less than 2 weeks till the bomb drops
U.S Set to Alter Rules for Banks Lending to Poor
Published: October 20, 2004
Federal banking regulators in the Bush administration are poised to limit the nation's primary law requiring small banks to serve low-income residents in their own neighborhoods through housing investments and development projects.
Since 1977, the Community Reinvestment Act has required banks with assets of more than $250 million to satisfy stringent tests gauging their banking services to low- and moderate-income residents. Because of that obligation, housing groups say, banks have channeled $1.5 trillion into housing, medical clinics and other projects. But many small banks have complained about being sapped by the time and money needed to comply, and also of being overmatched by the resources of larger banks.
So in recent months, two of the nation's four bank regulators - the Office of Thrift Supervision and the Federal Deposit Insurance Corporation, both headed by Bush appointees - have published formal proposals seeking to reduce the number of banks subject to the law. Under the proposal, only banks with $1 billion in assets would have to comply, meaning that 1,100 smaller banks would be subject to less scrutiny. The thrift office has already put its proposal into effect; the F.D.I.C. is a few months away from acting, although today is the deadline for public comment on the plan.
The two other bank regulators - the Office of the Comptroller of the Currency and the Federal Reserve Board - appear inclined to loosen their rules as well.
The F.D.I.C. proposal alone would mean that the number of banks required to comply with the toughest provisions of the law would drop to 227 from 1,138. In New York, the number is estimated to decline to 20 out of 81; in New Jersey, 12 out of 76. Some states, like Minnesota, New Mexico, Idaho and West Virginia, are projected to drop to zero.
The law's detractors say that while the Community Reinvestment Act may have initially been a well-intentioned response to limits on loans in poor neighborhoods, it has become irrelevant because small banks now recognize that community reinvestment is critical for their survival. In addition, these critics point out that through consolidation and inflation, the average size of banks has grown since the law's inception, so that the change does not substantially affect the amount of bank assets covered by the law.
The debate on the changes has become so intense that it has reached the presidential race. Vice President Dick Cheney demurred when asked about the proposed changes in August at a campaign rally in Iowa. But last month, Senator John Kerry said that he strongly supported keeping the law in its current form, and accused the Bush administration of choosing "favors for special interests over opportunity for millions of average Americans."
The law's critics say it has forced small banks to struggle to stay afloat, putting them at a competitive disadvantage with large banks more adept at complying with the law.
"Community banks are an endangered species, and they are drowning in a sea of regulation," said Representative Jeb Hensarling, a Republican from Texas who sponsored a bill this year to raise the threshold to $1 billion. "I'm not completely certain what purpose C.R.A. serves, period. If there are people who would like to repeal it, I would talk to them."
But many Democrats, larger banks and rural organizations say the Community Reinvestment Act has arguably been the nation's most significant community revitalization initiative. Before the law, many banks engaged in discriminatory red-lining practices by choosing not make mortgage and business loans to people in poor and predominantly minority neighborhoods. After the law, banks were held accountable to a higher and tougher standard, forcing them to actively pursue lending, investment and other activities in poor areas.
In New York, for instance, the law has been instrumental in financing a Pathmark on 125th Street - the first full-size supermarket in Harlem - and the Harlem USA shopping area, as well as the rehabilitation of hundreds of dilapidated apartments in upper Manhattan, the Lower East Side, the Bronx and Chinatown.
These supporters have accused regulators of acting capriciously in unveiling their proposals, and limiting or even eliminating the public comment period. But they are angriest at what they contend is a broader design to dismiss the housing needs of poor people, pointing to proposed cuts to the Section 8 voucher program.
"It's all part of a strategy," said Senator Paul S. Sarbanes of Maryland, the ranking Democrat on the Banking Committee. "This administration has no commitment to affordable housing."
The Community Reinvestment Act gained strength in 1995, when the Clinton administration adopted a series of tougher guidelines that banned noncompliant banks from participating in any mergers, acquisitions or expansion projects.
Over time, many banks - particularly giants with the resources to develop expertise, such as J. P. Morgan Chase and Bank of America - converted their legal obligation into a profitable business by investing in low-income housing, mortgage lending and urban development projects. Were it not for the law, only half, or less, of the housing and commercial revitalization projects in Harlem would have been completed, said Carol Parry Fox, who was executive vice president in charge of community development at Chase Bank in the 1990's.
Even Mel Martinez, President Bush's first housing secretary and now a Republican Senate candidate in Florida, said during his Senate confirmation hearings in 2001 that the law had a "very important role to play" in building communities allowing more Americans to own a home.
"One of the things that I have done in the private sector is serve as the director of a bank," Mr. Martinez said at the time. "And it is in that role that I know that at times it can be a headache for the private sector to fulfill the C.R.A. requirements. But I also know it is the right thing to do and it is a good thing for communities."
Quantifying the impact of the Community Reinvestment Act, however, has been subject to some debate.
In 2001, the Treasury Department reported that without the law, banks "would have advanced about one-fifth fewer home purchase loans to low- and moderate-income individuals and communities." But the following year, the Joint Center for Housing Studies at Harvard said the law was so outdated that its future impact was likely to diminish.
Salvatore Marranca knows about the calculus of compliance. While his current title is president and chief executive of Cattaraugus County Bank in western New York, he used to be a bank examiner for the F.D.I.C. Enforcing the law on his bank, he said, is a wasteful exercise, because just about all of his bank's loans already go to poor people.
"We are upper Appalachian here," he said. "We don't have another side of the tracks. We're all on one side of the tracks."
Given that criticism, regulators have discussed possible changes in recent years. And in January, they proposed to raise the threshold to $500 million. But in July, when some regulators hesitated, James E. Gilleran, director of the Office of Thrift Supervision, which oversees 923 thrifts and savings banks, made an unusual, unilateral announcement for his office to go to $1 billion, effective Oct. 1, without any public comment period.
Unhappy about the move, the Office of the Comptroller of the Currency and the Federal Reserve Board immediately withdrew their proposals for the $500 million threshold.
Then, in August, the F.D.I.C., which regulates 5,279 state-chartered banks, offered its own $1 billion proposal, with some differences. It would substitute a more flexible community development test for banks with assets between $250 million to $1 billion. It would also broaden the definition of community development beyond activities benefiting low- and moderate-income residents to include any rural resident.
To date, more than 7,300 people have submitted comments on the proposals. Many supporters are employees of small banks, working with the Independent Community Bankers of America.
Among the biggest critics are National Community Reinvestment Coalition, a nonprofit organization that tries to improve credit access for underserved communities, and the National Association of Affordable Housing Lenders, a coalition of banks, insurance companies, developers and pension funds. Even the National Association of Home Builders, which has generally been viewed as an ally of Republicans, says the proposal could adversely affect rural areas, said Bobby Rayburn, the group's president, who is a builder in Jackson, Miss.
F.D.I.C. officials say that they are taking such comments to heart. Indeed, in a speech to the American Bankers Association in New York this month, Donald E. Powell, chairman of the F.D.I.C., said he had not mind up his mind about the proposal, adding that "I do not want to do anything that will hurt our nation's communities by impairing the flow of credit to the underserved or otherwise undermining C.R.A. objectives."
Even so, many bankers and housing groups believe that the F.D.I.C. will ultimately approve its proposal and other regulators will follow suit. John D. Hawke Jr., who was the comptroller of the currency until his five-year term ended last week, said in an interview that he was "quite comfortable with raising the threshold to $1 billion," as long as there were some tougher community development standards.
Regardless of what the final regulations are, many bankers and housing groups believe that the debate of the Community Reinvestment Act will continue.
"I don't think it's good guys or bad guys,'' said Frances R. Grossman, executive vice president of ShoreBank Corporation in Chicago, which opposes the proposals. "I just think that they are motivated by being efficient and cutting costs, and if they see this as a way to cut costs or not have to do something, that's human nature."
Published: October 20, 2004
Federal banking regulators in the Bush administration are poised to limit the nation's primary law requiring small banks to serve low-income residents in their own neighborhoods through housing investments and development projects.
Since 1977, the Community Reinvestment Act has required banks with assets of more than $250 million to satisfy stringent tests gauging their banking services to low- and moderate-income residents. Because of that obligation, housing groups say, banks have channeled $1.5 trillion into housing, medical clinics and other projects. But many small banks have complained about being sapped by the time and money needed to comply, and also of being overmatched by the resources of larger banks.
So in recent months, two of the nation's four bank regulators - the Office of Thrift Supervision and the Federal Deposit Insurance Corporation, both headed by Bush appointees - have published formal proposals seeking to reduce the number of banks subject to the law. Under the proposal, only banks with $1 billion in assets would have to comply, meaning that 1,100 smaller banks would be subject to less scrutiny. The thrift office has already put its proposal into effect; the F.D.I.C. is a few months away from acting, although today is the deadline for public comment on the plan.
The two other bank regulators - the Office of the Comptroller of the Currency and the Federal Reserve Board - appear inclined to loosen their rules as well.
The F.D.I.C. proposal alone would mean that the number of banks required to comply with the toughest provisions of the law would drop to 227 from 1,138. In New York, the number is estimated to decline to 20 out of 81; in New Jersey, 12 out of 76. Some states, like Minnesota, New Mexico, Idaho and West Virginia, are projected to drop to zero.
The law's detractors say that while the Community Reinvestment Act may have initially been a well-intentioned response to limits on loans in poor neighborhoods, it has become irrelevant because small banks now recognize that community reinvestment is critical for their survival. In addition, these critics point out that through consolidation and inflation, the average size of banks has grown since the law's inception, so that the change does not substantially affect the amount of bank assets covered by the law.
The debate on the changes has become so intense that it has reached the presidential race. Vice President Dick Cheney demurred when asked about the proposed changes in August at a campaign rally in Iowa. But last month, Senator John Kerry said that he strongly supported keeping the law in its current form, and accused the Bush administration of choosing "favors for special interests over opportunity for millions of average Americans."
The law's critics say it has forced small banks to struggle to stay afloat, putting them at a competitive disadvantage with large banks more adept at complying with the law.
"Community banks are an endangered species, and they are drowning in a sea of regulation," said Representative Jeb Hensarling, a Republican from Texas who sponsored a bill this year to raise the threshold to $1 billion. "I'm not completely certain what purpose C.R.A. serves, period. If there are people who would like to repeal it, I would talk to them."
But many Democrats, larger banks and rural organizations say the Community Reinvestment Act has arguably been the nation's most significant community revitalization initiative. Before the law, many banks engaged in discriminatory red-lining practices by choosing not make mortgage and business loans to people in poor and predominantly minority neighborhoods. After the law, banks were held accountable to a higher and tougher standard, forcing them to actively pursue lending, investment and other activities in poor areas.
In New York, for instance, the law has been instrumental in financing a Pathmark on 125th Street - the first full-size supermarket in Harlem - and the Harlem USA shopping area, as well as the rehabilitation of hundreds of dilapidated apartments in upper Manhattan, the Lower East Side, the Bronx and Chinatown.
These supporters have accused regulators of acting capriciously in unveiling their proposals, and limiting or even eliminating the public comment period. But they are angriest at what they contend is a broader design to dismiss the housing needs of poor people, pointing to proposed cuts to the Section 8 voucher program.
"It's all part of a strategy," said Senator Paul S. Sarbanes of Maryland, the ranking Democrat on the Banking Committee. "This administration has no commitment to affordable housing."
The Community Reinvestment Act gained strength in 1995, when the Clinton administration adopted a series of tougher guidelines that banned noncompliant banks from participating in any mergers, acquisitions or expansion projects.
Over time, many banks - particularly giants with the resources to develop expertise, such as J. P. Morgan Chase and Bank of America - converted their legal obligation into a profitable business by investing in low-income housing, mortgage lending and urban development projects. Were it not for the law, only half, or less, of the housing and commercial revitalization projects in Harlem would have been completed, said Carol Parry Fox, who was executive vice president in charge of community development at Chase Bank in the 1990's.
Even Mel Martinez, President Bush's first housing secretary and now a Republican Senate candidate in Florida, said during his Senate confirmation hearings in 2001 that the law had a "very important role to play" in building communities allowing more Americans to own a home.
"One of the things that I have done in the private sector is serve as the director of a bank," Mr. Martinez said at the time. "And it is in that role that I know that at times it can be a headache for the private sector to fulfill the C.R.A. requirements. But I also know it is the right thing to do and it is a good thing for communities."
Quantifying the impact of the Community Reinvestment Act, however, has been subject to some debate.
In 2001, the Treasury Department reported that without the law, banks "would have advanced about one-fifth fewer home purchase loans to low- and moderate-income individuals and communities." But the following year, the Joint Center for Housing Studies at Harvard said the law was so outdated that its future impact was likely to diminish.
Salvatore Marranca knows about the calculus of compliance. While his current title is president and chief executive of Cattaraugus County Bank in western New York, he used to be a bank examiner for the F.D.I.C. Enforcing the law on his bank, he said, is a wasteful exercise, because just about all of his bank's loans already go to poor people.
"We are upper Appalachian here," he said. "We don't have another side of the tracks. We're all on one side of the tracks."
Given that criticism, regulators have discussed possible changes in recent years. And in January, they proposed to raise the threshold to $500 million. But in July, when some regulators hesitated, James E. Gilleran, director of the Office of Thrift Supervision, which oversees 923 thrifts and savings banks, made an unusual, unilateral announcement for his office to go to $1 billion, effective Oct. 1, without any public comment period.
Unhappy about the move, the Office of the Comptroller of the Currency and the Federal Reserve Board immediately withdrew their proposals for the $500 million threshold.
Then, in August, the F.D.I.C., which regulates 5,279 state-chartered banks, offered its own $1 billion proposal, with some differences. It would substitute a more flexible community development test for banks with assets between $250 million to $1 billion. It would also broaden the definition of community development beyond activities benefiting low- and moderate-income residents to include any rural resident.
To date, more than 7,300 people have submitted comments on the proposals. Many supporters are employees of small banks, working with the Independent Community Bankers of America.
Among the biggest critics are National Community Reinvestment Coalition, a nonprofit organization that tries to improve credit access for underserved communities, and the National Association of Affordable Housing Lenders, a coalition of banks, insurance companies, developers and pension funds. Even the National Association of Home Builders, which has generally been viewed as an ally of Republicans, says the proposal could adversely affect rural areas, said Bobby Rayburn, the group's president, who is a builder in Jackson, Miss.
F.D.I.C. officials say that they are taking such comments to heart. Indeed, in a speech to the American Bankers Association in New York this month, Donald E. Powell, chairman of the F.D.I.C., said he had not mind up his mind about the proposal, adding that "I do not want to do anything that will hurt our nation's communities by impairing the flow of credit to the underserved or otherwise undermining C.R.A. objectives."
Even so, many bankers and housing groups believe that the F.D.I.C. will ultimately approve its proposal and other regulators will follow suit. John D. Hawke Jr., who was the comptroller of the currency until his five-year term ended last week, said in an interview that he was "quite comfortable with raising the threshold to $1 billion," as long as there were some tougher community development standards.
Regardless of what the final regulations are, many bankers and housing groups believe that the debate of the Community Reinvestment Act will continue.
"I don't think it's good guys or bad guys,'' said Frances R. Grossman, executive vice president of ShoreBank Corporation in Chicago, which opposes the proposals. "I just think that they are motivated by being efficient and cutting costs, and if they see this as a way to cut costs or not have to do something, that's human nature."