#108 Nov/Dec 1999

Communities Need to Capitalize on Financial Services Modernization Act

Seldom in legislation as complex as the recently enacted Financial Services Modernization Act does any group get everything it wants. In this case, however, I suspect that nearly everyone involved […]

Seldom in legislation as complex as the recently enacted Financial Services Modernization Act does any group get everything it wants. In this case, however, I suspect that nearly everyone involved in shaping this initiative has something to feel good about.

First, community development professionals should celebrate the fact that the legislation upholds the legitimacy of the Community Reinvestment Act (CRA). After an effort to repeal the law outright or weaken it through various loopholes, Congress has, in effect, upheld CRA. Though depository institutions with assets less than $250 million receive some regulatory relief under the new law, their CRA obligation has not been reduced.

While the legislation’s language is clear, its effect on banks’ flexibility in meeting the credit needs of low- and moderate-income communities is less certain. Clearly, lenders did not fight for less stringent CRA oversight in order to engage in redlining. I am confident that most lenders will continue to look for good business opportunities wherever they exist – and that includes increasing their lending to low-income and minority borrowers.

In the same vein, CRA proponents did not fight for stronger provisions and an extended reach for CRA in order to “extort” money from banks. Their focus continues to be on sustaining and expanding the impressive, positive results of investment in communities that were underserved by financial institutions before CRA. While some in the financial services industry may complain about the “regulatory burden” of CRA, you would be hard pressed to find many of them arguing that it has not opened up new and profitable markets.

One potentially disruptive aspect of the financial modernization act could be the impact of its so-called “sunshine” provisions on nonprofits. While loosening regulatory standards on small financial institutions, language in the act suggests confusing and potentially burdensome reporting requirements for small nonprofits. Nonprofit organizations need to be involved in the rule-making process to ensure a minimum of confusion and resulting paperwork.

The ensuing regulations should address a number of uncertainties, including the level and frequency of information nonprofits will be expected to report. Nonprofit organizations across the country are concerned that these regulations could damage the wide range of existing business relationships and fee-for-service arrangements they have with banking partners. Do all these arrangements constitute reportable “agreements” with banks under the new law, if the nonprofit testifies or makes any comment at all regarding CRA?

Clearly, there have been competing interests in the debate over this legislation. Now that the dust is settling, it’s time to focus on the common interests shared by banks, non-bank financial institutions and nonprofit organizations.

With or without this legislation, the pace of innovation in the financial services sector was sure to increase. The current “explosion” in Internet and telephone banking has already raised serious questions regarding how to measure lenders’ CRA performance when their “service area” is the entire country. Given the rate of technological and other innovations, the forward-thinking question is not about holding on to the specific language of CRA. Rather, the focus of all responsible nonprofit organizations and CRA advocates needs to be on ways to carry out CRA’s principles and ensure an abundant flow of fairly-priced capital, even as the financial industry morphs into something so different from today’s banking system that we can’t even imagine it.

As this revolution occurs, healthy relationships between financial institutions and community-based nonprofits can yield benefits, both to business and to communities and their residents. Working together, we will continue our significant progress toward strengthening America’s communities.


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