Statement by William L. Rutledge, Senior Vice President, Federal Reserve Bank of New York, before the Subcommittee on Consumer Credit and Insurance and the Subcommittee on General Oversight, Investigations, and the Resolution of Failed Financial Institutions of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, August 10, 1993

Federal Reserve Bulletin, October 1993 | Go to article overview

Statement by William L. Rutledge, Senior Vice President, Federal Reserve Bank of New York, before the Subcommittee on Consumer Credit and Insurance and the Subcommittee on General Oversight, Investigations, and the Resolution of Failed Financial Institutions of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, August 10, 1993


In my comments today, I will focus primarily on the supervisory process we have followed in implementing the Community Reinvestment Act (CRA). I will address four areas: (1) our current examination approach; (2) the kinds of problems we have been finding; (3) what we can do to cause those problems to be corrected; and (4) how we are trying to make the examination process more effective. I will close with a few observations on trends in the ways in which banks have been satisfying their CRA obligations.

SUPERVISORY PROCESS

Examination Approach

The Federal Reserve Bank of New York supervises thirty-seven state member banks that are subject to the CRA, performing a comprehensive examination approximately every eighteen months. Work before the on-site examination includes extensive statistical analyses of a bank's Home Mortgage Disclosure Act (HMDA) data and plotting of the data on maps to demonstrate the geographic distribution of loan approvals and denials. Once in the bank, our examiners review procedures, interview bank personnel, and critically evaluate hundreds of loan files. The examinations are conducted by specialized Federal Reserve staff members--examiners whose training and responsibilities are directed exclusively to the review of bank compliance with the CRA and to such other consumer statutes as the Equal Credit Opportunity Act.

Types of Shortcomings Found

Our overall sense from these examinations is that when less-than-satisfactory performance is found, it is frequently characterized by shortcomings in two key areas. The first is a failure to commit significant dollars to lending and investing for community development. Within that category, I would include specially structured loans, investments, and grants directed to enhancing the long-term viability of a bank's community; such credits and grants normally entail innovative underwriting standards, some public funds, or the participation of not-for-profit organizations. Although some banks, including some large wholesale-oriented ones, have been very active in this area, others have done very little.

The second typical shortcoming is the failure to achieve an appropriate geographic distribution of mortgage and small business loan products throughout a bank's community. The bank either has failed to deliver its credit products within its delineated community--focusing instead on extending credit to more distant locales--or it has not adequately served the low- to moderate-income neighborhoods within its delineated community.

Enforcement Process

When our examiners find these or other shortcomings in a bank's performance, the findings are presented to the bank's senior management and its board of directors. Our examination report provides our rating of performance, details the problems found, and presents actions we believe should be pursued to remedy the problems. We require that the bank respond in writing, laying out its remedial program. If there is a downgrade in the rating, we also shorten the time period until the next examination--sometimes to as short as six months, depending on the severity of the problems.

The composite rating and the evaluation in support of it are required to be made public by both the bank and ourselves, contributing to the incentive of bank management to address its problems as quickly as possible.

It is our experience that when a bank's board of directors and its senior management are presented with negative findings, they typically take actions, to improve that performance. In this District, of the thirty-seven state banks, there have been five instances in the past two years when a bank that had been rated less than satisfactory improved to satisfactory.

The other key factor in enforcing CRA compliance is the applications process. Banks with general shortcomings in their CRA performance have effectively been foreclosed from expanding their bank operations. …

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Statement by William L. Rutledge, Senior Vice President, Federal Reserve Bank of New York, before the Subcommittee on Consumer Credit and Insurance and the Subcommittee on General Oversight, Investigations, and the Resolution of Failed Financial Institutions of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, August 10, 1993
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