To quote Mick Jagger, “You can’t always get what you want, but if you try real hard, you’ll get what you need.”
The CRA provisions in the financial modernization bill are the classic result of the legislative process in a democracy: They are an ambiguous compromise that leaves both sides dissatisfied. Senator Phil Gramm did not succeed in his campaign to permanently disable CRA with the “safe harbor” exemption for small banks. We have the Administration, the Treasury Department, and the progressive elements of Congress to thank for that. At the same time, advocates who campaigned for CRA to be expanded to cover acquired insurance and securities companies were also disappointed by the final legislation and the small steps backwards in some cases.
CRA was at extreme risk due to Senator Gramm’s tactic of holding the entire financial modernization bill (and all that lobbying money) hostage to final compromises in CRA.
The CRA compromise can be characterized as a reasonable one particularly given the alternatives. Senator Gramm’s extremely negative Senate bill was largely defanged in the compromise. He won no victory other than a petty, small set back in CRA regulation.
Positively, the legislation does require a bank to have a satisfactory CRA rating before expanding into new activities. Ninety-eight percent of banks meet this test, so it seems remarkable there was a spirited debate on such an innocuous standard. Yet without this provision, CRA would have been doomed to complete irrelevance in the new world of financial services. The Clinton Administration’s Treasury Department fought very hard to make sure this modest expansion of CRA’s reach was included. They faced determined opposition but insisted on this crucial piece as their price for signing off on a financial modernization bill.
The hard bargaining between the Treasury Department and Congress resulted in what had been a complete exemption from CRA for small banks being whittled back to a provision that stretched out the CRA exam cycle to four years for banks with a satisfactory rating and five years for banks with an outstanding rating. The complete exemption from CRA for small banks would have been a disaster for rural areas where most small banks are located. Small towns often have only one bank, and to exempt these little local monopolies from CRA would have resulted in less credit for farmers and small businesses in many parts of the country.
The financial modernization bill also contains unnecessary mischief called the CRA sunshine provision. This part of the bill requires banks and community groups that are party to CRA agreements to disclose their financial dealings and imposes penalties for failure to disclose. For example, this provision would apply to a nonprofit that was doing a housing counseling program for a bank or running a loan fund. The bank regulators are required to collect this information, but it is not clear what they are to do with it. The provision was much improved in the final flurry of negotiations.
Community groups may be able to satisfy the requirement by submitting audited financial statements. How this works out in practice is largely due to how the banking agencies draft the regulations. It is certainly ironic that a Congress bent on deregulating the financial system would impose a pointless paperwork requirement that may be burdensome on partnerships between banks and community groups that are improving neighborhoods.
The most vexing question of all is whether this bill will hurt low-income neighborhoods and CRA over the larger haul or not. The fact is that financial deregulation is already occurring around the country anyway through numerous loopholes in existing regulation. The bill codifies what is in fact happening and levels the playing field for securities firms and insurance companies. To date, there is no evidence that bigger financial institutions are harmful to greater community reinvestment – in fact, we might argue that large, targeted efforts by sophisticated, strong, well-staffed community reinvestment departments have helped move the field forward.
Yet, is this the best bill the community development field might get? There is great risk in opposing this bill to wait for one next year or the year after with Senator Gramm in control (and likely to remain so) and no assurance of a threatened administration veto, with a lot of lobbying power in the balance. In conclusion, the compromise makes sense to The Enterprise Foundation.
In the twenty-two years since its enactment, CRA has shown banks countless lending opportunities in neighborhoods that they otherwise would have overlooked. CRA loans have been profitable, and inner cities and low-income rural areas have benefited tremendously from the flows of capital from the private sector. CRA has created enduring partnerships between lenders and nonprofits and an entire new industry of community development lending. It is also not clear whether the tentative steps in the financial modernization bill to make CRA relevant in the new world of financial services will actually be effective. More important than this bill, there needs to be a strong movement to monitor performance, emphasize and deliver results, and marshal public policy in favor of all forms of community reinvestment.