News Release 2007-43 | April 20, 2007

Comptroller Dugan Discusses Evolution of Community Reinvestment Act And Says Effectiveness of OCC Regulation has Prevented Subprime Lending Abuses

LOS ANGELES—Comptroller of the Currency John C. Dugan said today that the 30-year old Community Reinvestment Act, once a source of conflict, is now characterized by a significant degree of cooperation between banks and community organizations.

"There are and will continue to be many points of friction and dispute between banks and community groups over CRA issues," the Comptroller said in a speech to the Greenlining Coalition's Annual Economic Summit. "I am, however, a pragmatic sort of person, and the revitalization projects I have seen in these last 20 months on the job are the real world results of a kind of constructive cooperation that I just did not see 15 years ago."

Comptroller Dugan, who was honored with the Greenlining Coalition's Distinguished Leader Award, noted that the OCC played its own important role in the evolution of CRA. In 1963, 14 years before the law's enactment, the OCC issued a legal interpretation authorizing national banks to "make reasonable contributions to local community agencies and groups to further the physical, economic and social development of the communities."

"That ruling was the starting gun for national bank community development investment," the Comptroller added.

In his remarks, the Comptroller expressed concern about the growing number of loan defaults and foreclosures, particularly with respect to subprime borrowers, and said the OCC has been taking concrete steps to address those issues for some time, a point that has been missed by some critics of this week's Supreme Court decision upholding federal preemption of state laws that restrict mortgage lending activities of national banks and their operating subsidiaries.

Some of the critics have argued that preemption has created a safe haven for abusive lenders since, they argue, the OCC does not engage in consumer protection regulation. They have also argued that preemption has prevented these states from taking effective action of their own.

"These arguments are just plain wrong," Mr. Dugan said.

"First, the mortgage lending activities of national banks are in fact subject to extensive regulation, a significant part of which is expressly designed to prevent predatory lending," he said. The OCC was the first federal banking agency to issue comprehensive anti-predatory lending guidance and regulations specifically applicable to the institutions it supervises – national banks and their operating subsidiaries – and it was the first of the federal banking agencies to undertake an enforcement action against unfair and deceptive practices under Section 5 of the Federal Trade Commission Act.

Moreover, there is hard data to show that national banks have not become a safe haven for predatory lending. National banks originated less than 10 percent of all subprime mortgages last year, and the delinquency rate for those loans is less than half the industry average. Nor are national banks identified with the truly predatory lending practices that have contaminated aspects of legitimate subprime lending, he said.

"We believe there is a reason for these results," Mr. Dugan said. "Our regulation and supervision of subprime mortgage lending of national banks and their operating subsidiaries, while not perfect, has been effective."

In fact, Mr. Dugan said, the lion's share of subprime lending is conducted by nonbank entities regulated exclusively by the states.

"Whatever one says about national bank preemption, it certainly has no effect on the ability of states to enforce state laws against state chartered entities over which they have exclusive jurisdiction, and it certainly doesn't handcuff state efforts to prevent those state-regulated lenders from making loans that borrowers have no reasonable prospect of repaying," he said.

"States can and should act here, and the OCC strongly supports the recent efforts by many states, urged on by the Conference of State Bank Supervisors, to extend the principles of federal mortgage guidance to such entities," he added.

Mr. Dugan said that unsound underwriting standards and abusive practices have no place in the national banking system, adding that all segments of the mortgage lending business should abide by those principles.

"Sound underwriting that realistically evaluates a prospective borrower's ability to repay an obligation, and timely information that enables borrowers to understand the terms, costs, and risks associated with a loan are not just matters of fairness – they're good business," he said, adding: "I believe that all lenders and regulators should share these common goals: that borrowers be treated fairly and responsibly, and that credit remain available to the creditworthy."

The Comptroller also expressed concern about rising delinquencies among subprime borrowers, and said the OCC strongly encourages national banks to help troubled borrowers resolve their problems.

"The OCC believes that it is in the best interest of both lenders and borrowers to work together to bring a loan current and to avoid foreclosure whenever possible," he said. "Let me assure you that national banks will not face regulatory penalties for engaging in responsible loan workout and recovery activity."

Mr. Dugan praised two large national banks, Citibank and Bank of America, for committing $1 billion to help borrowers with unaffordable loans refinance into new ones. The commitment is particularly impressive in light of the fact that national banks have not played a major role in subprime lending, he said, adding that the step is the type of activity that the Community Reinvestment Act encourages.

"And herein lies a certain irony," he added. "Some national banks, at least in part due to CRA, are ponying up real money to address a problem not really of their making, while a number of very large financial firms that have been much more heavily involved in adjustable rate subprime lending have made no similar commitments. I know Greenlining has urged a number of nonbanks to make voluntary CRA-like commitments, with some success. Maybe that's a thought worth thinking on a much larger scale."

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