There’s a lot of things in the world of bureaucratic regulations that don’t appear to make sense and can be downright funny and frustrating at times. For example, when I was in the state senate in Connecticut the Department of Information Technology was known as “DOIT”. I thought, “What a great name for the department that would help legislators understand the answers to important budgetary questions.” That is what I thought until I started asking questions and found out that the department couldn’t answer many questions. I was told that the software employed by DOIT went back almost 40 years and was incapable of getting answers to many questions. It was then that I understood the irony, the Department known as “DOIT” often couldn’t “do it”.
For the last 30 years I’ve been providing consulting services to banks all over the USA. One of the things that has always puzzled me is that thousands of banks that have CRA responsibilities are not required to collect or report CRA-related data. That’s right. There are about 4,300 banks across the country that are expected to fulfill and demonstrate they meet their CRA responsibilities. But about 3,600 of those banks are not required to collect, let alone report, pertinent CRA data. To be sure, all those banks are required to perform their CRA responsibilities, but fewer than 15% are required to report their activities. Regulators justify this as “regulatory relief”. But since all these institutions are required to perform their CRA responsibilities how can that be interpreted as “regulatory relief”?
Any prudential lender that is going to be held accountable to demonstrate they are fulfilling their CRA mandate should be collecting and monitoring their CRA-related activities. The worst thing a bank can do is to go into a regulatory compliance exam not knowing if they are meeting their CRA obligations. And yet, based on my 30 years of experience, that is exactly what happens in many cases.
The failure to collect and monitor CRA-related activities is even more puzzling when the FFIEC provides free software for data collection and reporting on a voluntary basis. For most banks this means zero software expense. Moreover, many banks don’t originate more than a few dozen small business or small farm loans a year, so the data entry costs would be minimal, and in most cases, not more than $1,000 annually.
For examination purposes, what happens when a bank has not collected and reported its CRA lending? In those cases, examiners will develop a “scientific sample” of the bank’s CRA lending activities. The problem is “scientific sampling” notwithstanding, how does a bank know if the sampling is accurate, especially if the results indicate the bank is failing its CRA mandate?
With only the largest banks reporting CRA lending there is no true “peer” data for small banks to compare their results to. Since examiners use the reported CRA lending to develop performance benchmarks, what is “satisfactory” performance is almost exclusively based only on what large banks do.
Regulators should reconsider the “regulatory relief” in the form of non-reporting CRA lending. It only encourages an “out of sight, out of mind” attitude among non-reporters and makes CRA examinations longer than need be due to the need to develop and analyze samples of data. It also hurts community banks that cannot compare themselves with true peers for CRA performance. Community bankers ought to reconsider if non-reporting is a good decision even if it is offered as a form of “relief” from regulations. It actually is against the best interests of bankers, the communities they serve (who are denied information about how their local bank is meeting the need for credit services) and to examiners who must spend extra time developing a performance evaluation based on sample data.
It’s time for bankers and regulators alike to recognize in this case no one benefits from this type of “regulatory relief”..
