For the past 20 years, the financial services industries have lobbied Congress to rewrite the key law that regulates them to better serve their particular interests. President Clinton has just signed into law the Gramm-Leach-Bliley Act (S. 900), which will repeal the Depression-era Glass-Steagall Act that forbade mergers of banks, finance and insurance companies, and securities firms. This repeal will enable the creation of enormous one-stop financial services institutions with unprecedented powers and cross-selling capabilities. The newly created conglomerates will be able to vastly increase their control over economic resources and consumers’ experiences with financial services while holding onto the protections of a regulated industry. Sadly for community groups and their constituents, the new statute does nothing to extend financial service companies’ responsibilities to lower-income people and communities.
In the recent debate surrounding this legislation, neighborhood and consumer advocates fought for expansion of the Community Reinvestment Act (CRA). The 22-year-old CRA combats discrimination by requiring regulated banks and thrifts to offer loans and banking services throughout their service areas, including lower-income communities. But the insurance and securities firms that can now merge with banks are not covered by CRA, so the expansion of the CRA umbrella to non-bank affiliates of firms offering banking services has been a key goal of community groups. Advocates worry that without this, CRA regulated companies will move financial assets to non-covered affiliates to reduce their CRA obligations. This concern has been sharpened by the steep decline over the last 20 years in the percent of American financial assets held by CRA-regulated banks and thrifts and the massive increase in the percent held by institutions not covered by CRA (currently 75 percent of total assets).
The House and Senate passed separate versions of the legislation, which differed significantly in their stance on CRA. Neither bill expanded CRA to the new affiliates such as insurance, securities, mortgage, and finance companies.
The Senate bill, passed on a purely partisan vote, contained several attacks on CRA, including an exemption for all banks with assets under $100 million. In addition, the bill’s “safe harbor” clause provided assumed compliance for banks with “satisfactory” CRA ratings – over 97 percent of all banks. The burden of proving otherwise was placed on community groups. They would be required to supply regulators with “substantial verifiable information to the contrary” on CRA performance when regulators considered a bank’s application to merge or acquire another bank. A “sunshine” provision in the bill would have also required community groups to report on any CRA “agreements” with banks (defined broadly as any written contract, agreement, or understanding made pursuant to or in connection with CRA and worth more than $10,000 annually). Nonprofits and banks could be penalized for non-compliance.
The House bill required banks seeking new powers to have and maintain a satisfactory CRA rating. Such institutions would have faced penalties including divestiture for failure to maintain such a rating. In addition, the House bill required insurance companies wishing to affiliate with banks to be in compliance with the Fair Housing Act. The House bill also differed from the Senate bill in permitting a new type of chartered, uninsured bank that could only accept deposits greater than $100,000. These wholesale financial institutions (WFIs) would have been subject to CRA.
In an unusual move, the three key Republican Chairmen bypassed the usual conference committee debates by writing a “final compromise” themselves. That bill’s CRA provisions resembled the original Senate bill. (House Banking Committee Chairman Jim Leach had fought in the House for a bipartisan bill with no anti-CRA measures while Senate Banking Chair Phil Gramm had insisted on the Senate’s anti-CRA provisions.) At this point, tremendous pressure was exerted on the Clinton Administration, which had earlier threatened to veto the Senate version, to sign the legislation, and intense negotiations continued over community reinvestment and consumer privacy provisions.
The final bill excludes some of the Senate version’s worst provisions. It has no safe harbor or small bank exemption. However, the CRA exam schedule for small banks has been significantly reduced to as rarely as once every five years, and the law imposes no penalties for banks that fail to maintain a Satisfactory CRA rating after being granted new powers. If such institutions fall out of compliance with CRA, they will only be stopped from gaining additional powers.
Consumer privacy was one of the most hotly debated issues in the final bill. The Senate bill contained no privacy provisions, while the House bill would have required financial institutions to allow customers to “opt out” of having their personal, financial, and medical information shared with third parties. The Gramm-Leach-Bliley Act calls for financial institutions to fully disclose their privacy policies but only requires the choice to “opt out” to prevent personal information going to “unaffiliated” third parties. President Clinton and members of Congress from both parties continue to express concern that these provisions do not protect consumers enough, and the President has proposed separate privacy legislation, particularly in relation to the sharing of medical records.
Another controversial issue during the final negotiations was Senator Gramm’s “sunshine” provision. The Clinton Administration thought it had a verbal agreement with Senator Gramm that the measure require a “comprehensive” accounting of CRA agreements, which an annual audit report would have satisfied. But the final bill calls for a “detailed and itemized list” of expenditures made under CRA “agreements” (as defined in the legislation) and contains penalties for nonprofits, but not banks, for noncompliance. Community groups assume the purpose of the provision is to discourage CRA activism.
The Gramm-Leach-Bliley Act will have a major impact on how financial services are delivered in this country and how community organizations and other nonprofits advocate for the fair and equal extension of capital and credit to low- and moderate-income communities. The greatest flaw of the financial modernization bills is that they all missed a once-in-a-generation opportunity to extend financial services. Financial institutions have gained unprecedented powers and privileges, and yet they have not been asked to assume any more responsibility to serve underserved communities.