February 12, 2008
Comptroller Dugan Urges Action to Help Communities Suffering from Effects of Mortgage Foreclosure Crisis
WASHINGTON — Comptroller of the Currency John C. Dugan called for an amendment to the Community Reinvestment Act regulation to provide CRA consideration for community development investments in middle-income communities that are distressed as a result of mortgage foreclosures and related economic factors affecting the area.
"With this change, we would give favorable CRA consideration for - and encourage - loans, services, and investments in more communities suffering from the consequences of foreclosures," Mr. Dugan said in a speech to the National Association of Affordable Housing Lenders.
The Comptroller cited Maple Heights, a middle-income suburb of Cleveland that is plagued by high foreclosure rates, as a community that would be helped by his proposed CRA amendment. The mayor of Maple Heights has said middle-income residents are moving out because they no longer feel safe.
Maple Heights "is an excellent example of where we ought to be encouraging new loans, services, and investments through CRA," Mr. Dugan said.
The Comptroller also urged Congress to restore the original scope of the public welfare investment authority of national banks, a step he said would also help communities like Maple Heights.
In the 2006 amendments to the federal law that authorizes national banks to make "public welfare" investments, the aggregate amount of investments permissible for national banks was increased, but the types of investments that can be made was decreased to include only those investments that "primarily benefit low- and moderate-income areas and people."
"While that limitation sounds sensible at first blush, the reality is quite different because the new standard precludes previously permissible investments that clearly promote the public welfare," Mr. Dugan said. For example, under the new standard, national banks are now effectively prohibited from making direct equity investments to help foreclosure-plagued urban and suburban middle-income areas - even if the effect of such investments would be to help low- and moderate-income neighborhoods as well.
In Maple Heights, although median income is declining, it was classified as overwhelmingly middle-income at the time of the last census. This prevents most areas of the city from receiving national bank public welfare investments under the new standard, Mr. Dugan said.
The Comptroller also raised a question about whether the Community Reinvestment Act should be broadened to cover not just banks, but also non-banks that provide so many of the same financial services as banks, and which played a significant role in the subprime crisis.
"Over half of subprime mortgages of the last several years - and the ones with the most questionable underwriting standards - were originated through mortgage brokers for securitization by non-banks, including major investment banks," Mr. Dugan said. "Yet these non-banks, having played such a large role in the subprime mortgages that have caused such problems in communities nationwide, are not covered by CRA and therefore have no CRA incentive to address these problems. To me, that is a world stood on its head."
Mr. Dugan said that non-banks, with all their financial resources, could bring billions of additional community reinvestment dollars to local communities. Non-banks could build on and enhance the substantial contributions already being made by banks for CRA purposes. Covering non-banks would also add a degree of transparency to the mortgage origination operations of these lenders, through the CRA public evaluations and public comment process.
The Comptroller said in his speech that the Community Reinvestment Act, now in its 31st year, has improved conditions in many underserved and economically depressed communities throughout the country.
"Banks, often in conjunction with community partners, have made loans and investments that have dramatically transformed distressed communities and helped build the personal assets of lower-income households," he added. "CRA lending and investment by banks has worked."