Final passage of the Gramm-Leach-Bliley bill means neighborhoods are likely to face two new investment battles, one local and one national. Locally, we’ll face a window of opportunity for new Community Reinvestment Act (CRA) agreements during what’s likely to be a new wave of mergers. Nationally, this legislation, which watered down the CRA, may be the beginning of a second anti-CRA crusade in Congress.
Financial companies were determined to merge even before Gramm-Leach-Bliley. Regulators had already allowed the creation of several financial behemoths, such as Citicorp and Travelers Insurance, based on the assumption that financial modernization would make the deal legal within two years. With the law’s passage, the desire for profits will continue to drive lenders to merge with and acquire each other. A significant number of companies have not yet merged, which presents an opportunity – as well as a challenge – to obtain agreements. After the first shakeout, likely to occur over the next five years or so, significant mergers and acquisitions may not take place for a long time.
We know from experience it’s possible to build effective local agreements through the megamerger process. When BancOne and First Chicago merged, six Chicago groups reached a local agreement with the new institution to lend $4.1 billion in six of Chicago’s underserved neighborhoods over the next 10 years, and in addition our Neighborhood Lending Program started in the 1980s with First Chicago has continued.
CRA agreements have always been hard work for community groups because of regulators. When NPA spurred the passage of CRA originally, we thought regulators would enforce the law. But with 97 percent of banks getting passing grades, CRA exams are a joke. Full responsibility for CRA enforcement has always been the job of people in the neighborhoods. When we wanted agreements, we had to do research, demand data, solicit banks, develop products and direct outreach to the borrowers. Community groups spend precious time and money educating banks and forming effective partnerships. Because of a history of redlining, banks are novices at community lending, with little or no experience doing outreach into low- and moderate-income communities and developing suitable products. Whether or not the law has changed, communities still have to fight on a grassroots level to make CRA work.
While local groups focus on attaining measurable and achievable CRA agreements, the national policy fight is far from over, thanks to Sen. Phil Gramm’s “Sunshine” amendment. Gramm also pushed through provisions for a Federal Reserve study of the profitability and default rate of CRA loans. Both the Fed study and the “sunshine” amendment will fuel the anti-CRA fight in Congress. As in the past, Gramm will use his access to information to misinterpret facts and publicize evidence of community “extortion.”
As chair of the Senate Banking Committee, Gramm is a formidable opponent. The same year he was appointed chair, Gramm pushed the financial reform bill through Congress after two decades of deadlock. If a Republican is elected president, communities and CRA proponents could lose even more ground – hard as that is to imagine since the ultra-flexible President Clinton sold out at the crucial moment and then put on a happy face to call the financial modernization bill a “compromise.”
The word on Capitol Hill is that Rep. Roukema (R-NJ) will sponsor anti-CRA hearings, likely to accompany legislation. Past anti-CRA legislation that could be revived includes small bank exemptions, or “safe harbors,” that would release banks receiving passing ratings for two or three years from CRA obligation (which, as noted, means nearly all banks).
So what should communities do today for CRA? Get agreements now. Don’t wait until the local bank announces a merger. Prepare for multi-year agreements and all the work they involve, because there may not be another opportunity.
The next five years or so will also be a critical time to provide evidence for what is likely to be a national policy fight over whether CRA works. So bring at least five residents to your local bank today and demand HMDA data. Study it and submit your comments to the regulators tomorrow!