Effect of modernization bill on
neighborhoods, maybe yours, in dispute
By Holden Lewis • Bankrate.com

Liberals worry that financial-services reform will encourage banks and insurance companies to abandon poorer neighborhoods and customers, weakening downtown areas and breaking down the ties between banks and the areas they serve.

Particularly hard-hit would be inner-city dwellers, critics say, predicting that they would have more difficulty opening bank accounts, getting loans and buying insurance.

"I think it will accelerate the problem by supporting the notion of bigger is better, and the mixing of banking and other industries is going to shift priorities in banking institutions," says John Taylor, president of the National Community Reinvestment Coalition.

Seeking to make CRA stronger
Taylor's group comprises nonprofit community groups that support the Community Reinvestment Act, a law intended to ensure that banks make an adequate number of loans in low- and moderate-income neighborhoods where they accept deposits. The law encourages banks to have branches in those neighborhoods. Taylor's coalition wanted banking reform to give the CRA new teeth -- for example, to block banks from affiliating with insurance companies that refuse to write policies in low-income or minority neighborhoods.

On the other hand, Sen. Phil Gramm, R-Texas, chairman of the Senate Banking Committee, has been trying for years to yank some of the CRA's teeth. He says the law is unnecessary and that it encourages inner-city community groups to extort low-interest loans and other favors from banks.

Gramm negotiated over four days with Treasury Secretary Lawrence Summers to arrive at a compromise on the CRA that would not be vetoed by the president. They came to an agreement at 2 a.m. Oct. 22, to conclude a 12-hour meeting.

Changes to the CRA
Gramm rejects any notion that the bill weakens the CRA, saying, "Nothing in this bill overturns any CRA provision in current law." But the bill does make some changes:

• Smaller banks and thrifts (those with less than $250 million in assets) that received an outstanding rating on their latest CRA examination would not undergo another routine CRA exam for at least five years.
  Under current law, they have to prove about every two years that they are abiding by CRA rules. Gramm says that smaller banks complained that the requirement is expensive and burdensome.
• Smaller banks and thrifts that received a satisfactory rating on their latest CRA exam would not have to undergo another routine CRA exam for at least four years.
• Banks and community groups would have to disclose any grants made to community groups of more than $10,000 and any loans of more than $50,000.
• Banks and community groups would have to report annually on how each grant or loan was spent.

Gramm and allies such as Sen. Richard Shelby, R-Ala., maintain that community groups have extorted payoffs such as low-interest loans in exchange for not protesting bank mergers. The disclosure requirement, they say, will shine a light on the alleged abuses.

Gramm was adamant about the disclosure provision and had implied that he would rather have the bill vetoed because of it than remove the language. He said that if the bill were vetoed he would just wait until a Republican president takes office in 2001.

The Texas senator's skepticism about the CRA might have hardened after hundreds of community activists, incensed by his opposition to the CRA, protested outside his Washington house in April, allegedly pounding on windows and littering the lawn with a profusion of yellow and green fliers.

• A bank, thrift or holding company with an unsatisfactory CRA rating would not be able to buy a bank, brokerage or insurance company. It would have to improve its CRA rating before such a merger would be approved.

Nor could a bank, thrift or holding company with an unsatisfactory CRA rating start new activities authorized by the Financial Services Modernization Act until it improved its rating.

• The Federal Reserve Board will study CRA lending, focusing on default rates, delinquency rates and the profitability of such loans. A report would be due by March 15, 2000. If it turns up problems and abuses, Republicans can use it to justify scrapping the CRA altogether.

The CRA, Shelby says, "has become a means for government to dictate to private financial institution where, how and to whom they must make investments. That is government-mandated credit allocation and it flies in the face of free-market capital flow principles."

Let the market decide?
Critics of the CRA say that the free market can best dictate the allocation of banking services in low-income neighborhoods. Taylor believes that attitude is naïve.

As banks merge with investment firms and insurance companies, the combined financial conglomerates will focus on what gives them the most profit, Taylor says -- and in some years, banking won't be where the profits are.

In those years, "Do you cut back on basic banking products?" he asks. "That's the fear, and it probably would be a good business decision to do that."

If the CRA is weakened, he says, individuals and community groups would lose their primary tool for pressuring banks to open branches and lend money in low-income neighborhoods.

-- Posted: Oct. 15, 1999