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CRA Evaluations Out from OCC: More Grade Inflation

Adam Rust's picture

Posted August 27, 2009

The OCC announced results on 20 CRA evaluations today. Not surprisingly, 19 of the 20 banks got a "satisfactory" and the other received an outstanding.

It has been our feeling for some time that the CRA exams are a charade.  They are supposed to uncover a lack of performance in low or moderate-income census tracts. In any year, more than 2,000 banks are evaluated. In 2008, 2,051 institutions were evaluated.  Twenty-nine were deemed "needs to improve," and four received a "substantial non-compliance.  That won't lead to much change, because it doesn't take a rocket scientist to realize that the regulators are avoiding conflict.  In fact, the market appears to be a stronger enforcement agent - the two largest lenders to get anything below satisfactory were Countrywide and AIG.

This cycle's outstanding score went to Ephrata National Bank.  (Ticker - ENBP) Here is the pdf of the exam.  Ephrata

has about $688 million in assets.  It serves the northern part of Lancaster County, Pennsylvania.

Ephrata might not be a bad bank.  I certainly don't mean to pick on them.  My main thrust is to point to them as an example of the lack of stringent implementation of the rules in the Community Reinvestment Act.  With Ephrata, for, example there doesn't seem to be much relationship between this institution's lending, investment, or service and the surrounding CRA-tested areas.

For example:

  • Ephrata has no (0, zero, zip, nada) branches in low or moderate-income census tracts.
  • Ephrata made fewer than 4 home mortgage loans in moderate-income census tracts.  They didn't make any in low-income census tracts.
  • The bank made no community development loans during the exam period.

The OCC remarked that it gave extra weight to the lending portion of the exam. Ephrata got an outstanding in the lending portion.  Again, that is surprising that this would lead to an outstanding overall score because Ephrata is largely disconnected from low or moderate income constituents.  The exam doesn't say how many loans Ephrata made in this tract, only that it made fewer than four.

Ephrata's participation in LMI tracts lagged the share of local population in those tracts.  Likewise, the percent of home mortgage loans to low-income individuals lagged the share of such individuals in the area.

Ephrata got credit for its My Community Mortgage.  While the intention in this program may be good, it reflects a notion of what good credit should constitute.  The product allows for a 97 percent LTV, a higher than normal debt-to-income ratio, a 40-year term, no required down payment from the borrower (outside parties can make the downpayment - i.e. realtors, the seller, or the bank), and low credit scores.

They also got credit for their short-term consumer loan product.  The OCC appears to favor it as some kind of alternative to a payday loan.  Maybe it's a good thing to offer something like this - but then again, it is also a high-interest product (from an annual APR perspective).

These kind of loans should broaden the range of participants in home mortgage lending.  However, they also open up the possibility that poor borrowers will get mortgages with debt service loads that are not sustainable.  For the broader community, it increases the possiblities of foreclosures.  For the borrower, these loan present risk about having enough to make mortgage payments (particularly if borrowers are also servicing other debt - credit cards, auto loans...).  Oh, and half the notion is to build equity, but if the loan terms are stretched to 40 years, then isn't that even more of a remote possibility.

The critique of this program is somewhat moot, though, because Ephrata didn't really reach any of these borrowers.  They have the program in place, sure.

I am left with two questions:

In the specific case of Ephrata, I am left with an existential query: If a loan is in the woods but  no one gets it, does the loan really exist?

More broadly, I have to examine the efforts of our regulators.  Is it reasonable to speculate that there is something larger here? Is CRA being undermined by slow attrition, where policy makers make institutions progressively less accountable to the law?