Banking Regulators' Proposed Rule Change Will Reduce Consumer Access to Mainstream Financial Services In Urban and Rural Communities

September 9, 2004
Allen Fishbein, CFA, 202-387-6121

CFA Joins with Others to Urge the FDIC to Withdraw its Proposal to Exempt 900 Banks from More Rigorous Community Lending and Retail Banking Service Reviews

Washington, D.C.- The Consumer Federation of America (CFA) today joins with national civil rights, community, housing organizations, and distinguished members of Congress in calling for the Federal Deposit Insurance Corporation to withdraw proposed rule changes to the Community Reinvestment Act (CRA). These changes, along with similar new rules recently adopted by the Office of Thrift Supervision, would have a devastating impact on access to credit and affordable banking services for the residents of low and moderate income in urban and rural communities.

"This is the wrong time for the FDIC to be weakening standards when communities across America have witnessed dramatic increases in predatory lending and other abusive financial services practices that thrive due to the lack of mainstream bank activity," said Allen Fishbein, CFA's Director of Housing and Credit Policy.

The FDIC, which supervises most state-chartered banks, recently proposed rules to quadruple (to $1 billion) the minimum asset size that triggers a more stringent CRA review. The result, an additional 900 banks will no longer be required to adhere to more comprehensive CRA standards. The FDIC proposal would mean that only about 4% of FDIC-supervised banks (223 of 5,291), and only 1% of banks in rural areas, would undergo the full CRA examination.

"With this proposal, the only thing consumers can bank on is the fact that as mainstream lenders are allowed to shut their doors, the predatory lenders and fringe financial operators will open theirs," Mr. Fishbein stated. "Thus the big winners from these rule changes will be the payday lenders, who charge triple-digit interest rates, and the other fringe financial service providers, who provide exorbitantly priced services to those consumers who have no where else to turn."

The Federal CRA statute reaffirms the obligation of banks to serve all segments of their communities, including low and moderate-income areas. For banks with assets over $250 million the present CRA exam is comprised of a three-pronged test that looks at a bank's record of providing lending, services, and investments to their local communities. The FDIC's proposal dramatically weakens the lending testing and completely eliminates the service and investment tests for banks with assets between $250 million and $1 billion.

Among other things, the proposed change deletes any regulatory incentive for these banks to open and maintain branches and ATM machines serving low and moderate income geographies, to provide affordable banking services and checking and savings accounts necessary for bringing the millions of unbanked households into the financial mainstream and to offer money transfer and remittance services, which are particularly important to new immigrants and ethnically diverse communities.

Adopted by all four banking regulatory agencies a decade ago, the current "service test" is intended to encourage banks to become more active in tending to essential retail banking services needs of low- and moderate- income consumers. The FDIC's proposal would mean that federal examiners for CRA purposes would stop reviewing the retail transaction account services provided by the exempted banks. FDIC has proposed a weak and totally inadequate "community development criterion" to serve as a substitute for the elimination of the present service and investment tests (these two tests together presently comprise 50% of a bank's CRA grade). However, retail services are not addressed at all in the proposal.

"The FDIC proposes to substitute a weak and trivial criterion for the present and more comprehensive tests and hope that the public doesn't notice, Mr. Fishbein stated, "This form of addition by subtraction simply doesn't add up. The FDIC in publishing this proposal has given no indication that it even considered the negative impacts that this proposal will have on the critical needs of underserved consumers and communities. The proposed rule change should be junked."


The Consumer Federation of America is a nonprofit association of 300 consumer groups, established in 1968 to advance the consumer interest through research, education, and advocacy.