Does banking legislation have the potential to either devastate or revitalize working class and minority neighborhoods?
Well, consider the following scenario. A hard-working single mother rises early and commutes from her city neighborhood to the downtown office building where she works as a janitor. On her way to the bus stop, she notices her local bank branch is closed. Her dream of opening a cleaning business fades; she had been working up the courage to approach the branch for a small business loan.
A few weeks go by. Because the bank customers are gone, the grocery store and a restaurant next to the bank branch also close. A few muggings occur at her bus stop; there is not the store foot traffic that would deter crime.
As things continue to go downhill in her neighborhood, she notices something mysterious and infuriating. The bank that operated her local branch has now opened a brokerage in the lobby of her office building. She has no access to the brokerage because she does not have the minimal amount of savings required for its mutual fund and other investment products.
This story will start repeating itself in neighborhood after neighborhood if Congress enacts “financial modernization” legislation without adding consumer and community protection provisions. The House of Representatives is currently considering H.R. 10, or the Financial Services Act of 1997, which would allow banks, mutual funds, and insurance companies to develop huge new financial conglomerates. Today, there are limitations on the amount of cross-ownership among the different types of financial institutions. H.R. 10 would virtually eliminate those limitations.
H.R. 10 in its current form is harmful to neighborhoods because it will weaken the Community Reinvestment Act (CRA). Enacted in 1977, the CRA requires all depository institutions (banks and thrifts) to serve the credit needs of all communities in which they are chartered – including low- and moderate-income communities. Federal regulatory agencies evaluate lenders’ records of community reinvestment by measuring their level of loans, investments, and services in minority and lower income neighborhoods. If a lender has a poor record of community reinvestment, then the federal regulatory agencies have the power to delay or deny a lender’s request to merge with another depository institution. In an industry that is rapidly consolidating, the possibility of regulatory interference with merger plans makes lenders take CRA seriously.
CRA has bestowed tremendous benefits on minority and inner-city communities that have suffered from the discriminatory practices of redlining. Before CRA, lenders would literally draw red lines around certain neighborhoods and refuse to lend in them, even as they siphoned deposits out of them. Since the passage of CRA, lenders have signed CRA agreements of over $210 billion with community organizations. The agreements establish affordable home purchase and small business loan programs directed towards traditionally underserved neighborhoods.
If H.R. 10 is enacted, financial institutions can play all sorts of games to evade their CRA obligations to serve the credit needs of all the communities from which they gather deposits. Financial conglomerates could shift assets out of their bank and thrift subsidiaries into their insurance and mutual fund affiliates. When they shut branches, they can then claim that their banks and thrifts do not have as much assets or financial wherewithal to comply with CRA. In addition, H.R. 10 would allow bank holding companies to acquire the largest insurance companies and mutual funds in the country without applying to a federal regulatory agency and thus subjecting their application to CRA scrutiny. Needless to say, this will decrease lender attentiveness to CRA.
To turn H.R. 10 into a bill friendly to community reinvestment, CRA must be extended to all financial institutions allowed to affiliate with banks. Bank holding companies would no longer be tempted to shift assets in order to evade CRA obligations. In addition, something profound would start to happen. Not only would bank branches remain open in working class neighborhoods, they would sell mutual funds and insurance policies as well. The Comptroller of the Currency, Eugene Ludwig, is fond of saying that CRA has democratized access to credit. If CRA is expanded, it will democratize access to wealth.
What else could the hard-working single mom who cleans floors everyday ask for in this great country of ours?