Feds hammer out CRA changes

The Community Reinvestment Act (CRA), which mandated that financial institutions meet the credit needs of the communities in which they do business, seemed like a good idea at the time. Then everyone started complaining.

Community bankers have claimed that the CRA is too burdensome, forcing them to spend an inordinate amount of time and money to comply.

Conversely, community groups have argued the rules are too lax and that most banks get good CRA ratings no matter what their actual performance. They asked for tougher language, pointing out that those individuals and businesses not part of the “Good 01′ Boy” network are indeed discriminated against.

Activists pointed to numerous studies supporting their claims of bias in lending. In 1991, for instance, Professor Timothy Bates of the New School for Social Research studied 10,000 firms in 28 cities and found that such discrimination inhibits growth and prosperity in majority black areas. And Faith Ando, working with the Small Business Administration in 1988, found that nationally blacks were rejected for small business credit more than any other ethnic group.

So, nearly two years ago, President Clinton asked the nation’s banking regulators to rewrite the rules to make the act more acceptable to both sides.

Beginning in July 1993, regulators talked with hundreds of people affected by CRA. By December of that year, they had written tentative rules and invited public comment for a period that ended last November. Now the regulators are reviewing the comments and making necessary changes. No time period has been set, but insiders say that April is the earliest that final regulations will be published.

Henry Gonzalez (D – Texas), an outspoken advocate for community groups and the ranking member of the House Banking Committee, says, “This plan is not a magic cure, but it offers real hope.”

Currently, regulators use a 12-pronged test to determine if banks are meeting the needs of their communities. They consider how well banks meet those criteria when those same banks want to merge or set up new branches.

Activists contend that banks with no such plans have little incentive to comply with CRA. And those that do have plans need only meet the minimum requirements to receive passing grades. Bankers complain the evaluations are subjective, causing banks with similar records to get different grades.

Under the rules likely to go into effect, a dual system — one for banks with less than $250 million in assets and one for banks with more — would be established.

But the bigger banks object to a provision that would require them to collect information on the race and gender of those applying for small business loans of $1 million or less. Even the smaller banks are concerned, claiming that such a policy could trickle down to their level.

Lawrence Lindsey, a member of the Federal Reserve Board, which helps oversee CRA regulation, says that requiring ethnic records is both a cumbersome and useless exercise.

If two borrowers are treated differently for no apparent reason, he says, an investigation would be triggered. “The real question is not `Do we lack adequate tools?'” Lindsey says. “It is `Will this tool make a difference?'” Lindsey believes it will not.

However, despite the controversy over the “ethnic” provision, Lindsey acknowledges that it is likely to remain in the final draft and that the Federal Reserve will enforce it. And along with the community activitists, he supports the revamped regulations as a progressive step.