cra

May 11, 1999

Clinton's Cynical War
On Banking Reform

                   By Lawrence B. Lindsey, a former chairman of the Neighborhood
                   Reinvestment Corp., is a resident scholar at the American Enterprise
                   Institute.

                   Last week the Senate passed a bill overhauling the regulation of banks,
                   including a provision sponsored by Sen. Phil Gramm (R., Texas), chairman
                   of the Banking Committee, to reform the Community Reinvestment Act.
                   Mr. Gramm's provision has stirred controversy, to say the least. Last month
                   hundreds of "community activists" descended on his house, where they
                   pounded on the windows, trampled the landscaping and left the yard
                   covered with garbage.

                   The 20-year-old CRA requires banks to serve their entire community.
                   Regulators take banks' CRA compliance into account when deciding
                   whether to approve applications for mergers or expanded services. In the
                   recent wave of bank consolidation, banks have made billions of dollars of
                   loan commitments and signed agreements with numerous community
                   organizations in order to be seen as complying with CRA.

                   Sen. Gramm has complained that many of these
                   payments amount to little more than extortion
                   sanctioned by federal bank regulators, a claim
                   bolstered by the protesters' behavior at the
                   senator's house. While the great majority of CRA
                   activity is legitimate, some banks and their
                   executives have been subjected to similar
                   personalized and heavy-handed tactics with a
                   demand that they sign agreements that, in effect,
                   fund the protesters. Other banks find their mergers
                   held up by legalistic protests until they pay up.

                   I helped write the current CRA regulations when I
                   was a governor of the Federal Reserve, and I part company with Mr.
                   Gramm on the degree to which the CRA encourages extortion. In fact,
                   those regulations, implemented in 1996, were designed to reduce the
                   potential rewards for such behavior. Most bankers and community
                   development professionals agree that the regulations have been successful in
                   that regard. Yet I think Mr. Gramm is getting a bum rap.

                   Mr. Gramm's proposed reforms are quite modest. You wouldn't know it,
                   though, from listening to the Clinton administration and its supporters.
                   President Clinton himself attacked the Gramm proposal in a February
                   meeting with the nation's mayors. Treasury Secretary Robert Rubin, the
                   Rev. Jesse Jackson and Ralph Nader all joined the chorus. The attack
                   strategy worked. Regulators with whom I spoke said they believed Mr.
                   Gramm was out to destroy CRA, although when pressed, they admitted
                   they didn't know the details of his proposal.

                   When I spoke to a group of community-development professionals, there
                   was stunned silence when I described how mild Mr. Gramm's proposals
                   actually are. First, he proposes that a bank that has earned "satisfactory"
                   ratings from the regulators for three years running be presumed in
                   compliance with the law, unless evidence is presented to the contrary.

                   Second, he proposes that small rural banks be exempt from CRA. The
                   banks that would be excluded under this plan have a total of 2.8% of all
                   U.S. bank assets; the banks with the remaining 97.2% would remain
                   subject to CRA. When we wrote the current CRA regulations, we
                   recognized the burden they placed on small banks and carved out a
                   streamlined examination procedure for them. Mr. Gramm takes this
                   principle only a little further.

                   Why, then, is the administration demonizing Mr. Gramm? As with similar
                   disinformation campaigns in the past, the attack is meant to draw attention
                   away from an issue on which the administration is vulnerable. What is really
                   at stake here is a separate provision of the banking-reform bill, concerning
                   the question of which agency should regulate most banks--the Fed, which is
                   independent of the administration, or the comptroller of the currency, who
                   reports to the Treasury secretary. Mr. Gramm's bill, which passed on a
                   near-party-line vote, favors the Fed.

                   Such a bureaucratic turf struggle is not the stuff over which nonbureaucrats
                   go to the barricades. So the administration has instead rallied the troops
                   with a campaign of exaggeration about the CRA. In short, the
                   community-development industry is being used as a pawn by the
                   administration in a power struggle with the Fed.

                   The worst part of this is that the community-development industry is finally
                   coming of age. All around the country, community-development
                   professionals are engaged in exciting partnerships with for-profit
                   organizations to rebuild the physical and social infrastructure of some of
                   America's blighted areas. The best of these are run in a very professional
                   and businesslike fashion; their management teams could compete with any in
                   corporate America.

                   Unfortunately, much of the industry is still quite insecure, with deep
                   memories of being caught between widespread private-sector indifference
                   and an unresponsive federal bureaucracy led by the Department of Housing
                   and Urban Development. And some of the more flamboyant leaders in
                   community development, who cut their teeth in the radicalism of the 1960s,
                   are quick to lead protest marches and demonstrate their feelings. They have
                   been co-opted as unwitting foot soldiers in bigger wars, such as the
                   Comptroller-Fed battle and the feud between the mortgage-insurance
                   industry and the secondary mortgage market.

                   In the long run, there is no alternative to a zero-tolerance policy with regard
                   to extortion in CRA or the type of protest that occurred at Sen. Gramm's
                   house. Such behavior poisons the well of goodwill that makes community
                   reinvestment possible. The time has come for those responsible for the
                   success of CRA to break their silence and make clear whether they want
                   community development to be a business success story or just some
                   politician's sound bite.

                   What is needed is a clear way to demarcate those who deliver real
                   community development from those who deliver a mob outside a bank
                   branch or senator's house. The best people to do this are the leaders of
                   community groups themselves. In private, some of the most accomplished
                   practitioners have told me how embarrassed they are about the events at
                   Mr. Gramm's house. They have not shied away from using the term
                   "extortion" to describe activity that clearly fits the definition. These people
                   know that their good efforts are made more difficult by the extortionists,
                   who misuse resources and give community development a bad name.

                   Banks themselves must also make clear that they will not pay for political
                   favors or meet extortionists' demands. The intent of CRA is to ensure that
                   an adequate number of loans are made in low- and moderate-income
                   neighborhoods and that those areas have access to bank branches and
                   other banking services. There is no requirement that civic or community
                   leaders must say nice things about the bank or that the bank must contribute
                   to those leader's' pet causes or even their own organizations.

                   It is often too easy for bank management to simply pay for a problem to go
                   away. Regulators should make sure that this doesn't happen, by insisting
                   that CRA-type payments made by bank management go for services
                   rendered--such as loan referrals--and are not de facto political contributions
                   or extortion payments. Regulators would not tolerate a bank management
                   that violated the Foreign Corrupt Practice Act by bribing foreign officials.
                   Nor should they allow bribes to community groups in the U.S. The
                   administration, meanwhile, should stop using America's developing
                   communities as pawns in its own bureaucratic battles.