In its sweeping changes to the laws governing banks, insurance companies and securities firms, the Gramm-Leach-Bliley Act (the “Act”), which was signed into law by President Clinton on Friday, November 12th, creates a new framework in connection with the convergence of these industries to finance affordable housing and other community development activities.
Provisions of the Act relating to the Community Reinvestment Act (“CRA”) and the Federal Home Loan Bank system have the most specific impact on housing and development. These provisions include:
•Financial Holding Companies (“FHC’s”)
The crux of the Act is its grant of authority which allows bank holding companies to elect to become newly created entities called Financial Holding Companies which may engage in activities, and acquire companies engaged in activities, that are financial in nature or incidental to them, if the Federal Reserve determines that such activities pose neither a substantial risk to the safety and soundness of depository institutions or the financial system in general. In granting this authority, Congress has repealed the historic restrictions of the Glass-Steagall Act on affiliations between banks and securities firms engaged in underwriting, and restrictions in the Bank Holding Company Act of 1956 on affiliations between banks and insurance companies and insurance agents.
The impact of this change on housing and community development owes more to what was not required than to the standards and affirmative obligations established by the Act for approving the new Financial Holding Companies. As the share of the nation’s deposits held by regulated depository institutions and the share of home mortgage loans made by them have declined markedly in recent years, the potential impact of the Community Reinvestment Act has declined. This decline has occurred at the same time as the dollar volume of loans and investments made as a result of CRA has increased due to public pressure and increased enforcement once banks’ CRA performance and Home Mortgage Disclosure Act data were made public after 1989—information that was not available during the first dozen years of CRA.
To address the changing marketplace for financial services and the continued unmet needs of low- and moderate-income people and neighborhoods for access to capital, CRA advocates began calling for an expansion of CRA to those segments of the industry where more deposits were flowing and loans were being made. However, the last four years have seen repeated attempts by Congressional leaders to substantially roll back CRA. Gramm-Leach-Bliley takes a middle ground in that context by not expanding CRA provisions to other segments of the industry but requiring that insured depositories meet a minimum CRA standard before they may participate in the newly permitted affiliations. A number of CRA advocates urged the President to veto the bill on the grounds that it is harmful to community reinvestment because the standards are not high enough and do not adequately address the massive shifts in the market place since CRA was first enacted. Both the industry and community representatives likely see in the Act as much as could be expected given the legislative battles CRA has faced over the last four years, and some concede that procedural reforms were inevitable as part of bank reform legislation. Others in Congress and the industry see the CRA changes as desirable and will push for additional changes in future years.
•"Satisfactory" CRA Rating Required
Elections by bank holding companies to become FHC’s and expansion by FHC’s to new activities, will not be approved by the Federal Reserve unless all subsidiary insured depository institutions of the holding company received satisfactory or better CRA ratings at their last CRA exam.
This undoubtedly will lead to more consolidation of banking charters within large financial institutions because some existing bank charters may be, or will be at risk for being, in unsatisfactory compliance with CRA. Presumably, such charters will be merged with an insured depository that has a satisfactory rating. Additionally, some charters which have been maintained for their possible strategic position due to powers, geographic location or other reasons may be closed because of the risk that such a charter, while relatively small in terms of asset size, could fall out of compliance for CRA purposes and jeopardize the expansion plans of the parent company whose lead institution is satisfactory or better for CRA purposes.
The conference report does not indicate whether the Federal Reserve can deny elections of FHC status or expansions by FHC’s if there are complaints from the public or community organizations that one or more subsidiaries of the holding company do not comply with CRA despite a satisfactory rating, but the current practice of the agency which is likely unaffected by the Act is to review CRA ratings as a “floor” or minimum requirement that needs to be met while a full review of the entire record in a particular application will constitute the basis for final agency action. The Act does not provide any penalty to Financial Holding Companies that do not maintain at least a satisfactory CRA rating after their expansion to new activities is approved. Such a provision was included in the House version of the bill but negotiated out in conference. For those enterprises operating as a unitary thrift holding company, expansion into securities and insurance activities is permitted without regard to the Act. Though such enterprises would not have a statutory requirement to be well-capitalized and well-managed in addition to having a satisfactory CRA rating, the OTS could regulate in a way which imposed such requirements.
•CRA Sunshine Requirements
The Act requires full disclosure of so-called “CRA Agreements” entered into by regulated depository institutions and community-based organizations pursuant to or in connection with CRA. This provision stems from the contentions of Senator Gramm and some other Congressional leaders that there is something inherently dubious or improper about such agreements and that public disclosure will serve to limit any abuses with respect to such agreements. The Act requires parties to such agreements to make the documents publicly available and to file at least annual reports with the appropriate Federal bank regulatory agency with supervisory authority over the insured depository institution that is a party to each such agreement. The conference report indicates that the non-governmental entities required to report may do so where appropriate by submitting audited annual financial statements or Federal tax returns. Penalties for noncompliance are not identified in the conference report. Regulations from the Federal banking agencies will also help clarify the scope of these requirements.
•Small Bank Regulatory Relief
Regulated financial institutions with assets under $250 million will now be subject to a less frequent CRA examination schedule based on their performance in the most recent examination. Institutions are currently examined generally at least once every year or two years. The Act provides that institutions with satisfactory ratings will be examined every four years and institutions with outstanding examinations will be examined every five years. Institutions with less than satisfactory ratings will be subject to more frequent examinations as determined by the appropriate Federal bank regulatory agency, which may also examine any institution more or less frequently for reasonable cause. It is likely that federal banking agency resources will be shifted away from CRA supervision and examinations as a result of these changes.
•Federal Reserve Board and Treasury Studies
The Act also mandates two studies to be conducted in connection with CRA: the first report by the Federal Reserve, to be delivered to Congress by March 15, 2000, is a comprehensive study of CRA to focus on default and delinquency rates, and the profitability of loans made in connection with CRA; the second report to be conducted by the Treasury Department over the next two years, is intended to determine the impact of the Act on the provision of services to low- and moderate-income neighborhoods and people, as intended by CRA. Both studies will form the basis for Congressional hearings and oversight. What may emerge from these studies and subsequent Congressional oversight is evidence of below market rate performance for investments which suggests that a “premium” for the associated CRA credits is being paid for in the marketplace. This type of disclosure could have a competitive impact on the pricing and terms for syndicators of tax credits and others offering low-and-moderate income housing development investment opportunities to financial institutions.
•Federal Home Loan Bank System Modernization
First among the changes made by the Act to the Federal Home Loan Bank (“FHLBank”) system is elimination of mandatory FHLBank membership for Federal savings associations, making membership completely voluntary. Other changes include expanded access to advances for small banks; decentralized governance of the FHLBank system away from the Federal Housing Finance Board and to the 12 regional banks; a change in the obligation of the FHLBanks to repay Resolution Funding Corporation (“REFCORP”) bonds stemming from the savings and loan crisis of 1989 from a fixed dollar amount to a fixed percentage of annual net earnings; and a change to the capital structure for the FHLBanks. An impact on community reinvestment could come from governance changes to the 12 FHLBank boards relating to public interest directors and pilot programs approved by individual FHLBanks addressing housing and development needs.
Copyright) 1999 Nixon Peabody LLP. All rights reserved.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require and further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative.