Clinton pushes banks to serve poorer areas

December 09, 1993|By New York Times News Service

WASHINGTON -- The Clinton administration yesterday proposed tough tests designed to ensure that banks end discrimination in their lending to minorities and people with low vTC and moderate incomes.

The proposals are the latest development in a yearlong effort by the administration to broaden access to credit, financial services and investment.

Administration officials predicted that people and businesses in these communities would have access that they might not otherwise have to billions of dollars of credit, once the proposals take effect in 1995.

The regulations, which set higher standards for banks to meet, for the first time apply objective measurements on three levels. Banks would be tested in several ways to determine whether their loans in specific neighborhoods are fair, whether they are investing in the community's growth by making grants for

economic development and whether they are providing a full array of customer services.

Although federal examiners would still have a fair amount of leeway in determining whether an institution is complying with the law, banks could for the first time face sanctions like binding orders, or even fines, to change their practices.

That would give regulators additional powers. Now, a bank's poor record in this area can affect whether regulators will permit bank acquisitions or mergers, and banks that fail are vulnerable to legal challenges by community groups or regulators.

The proposal is the most important modification to equal lending enforcement since 1977, when Congress passed the Community Reinvestment Act. That law was designed to force banks to make loans to individuals, businesses and groups in neighborhoods that many of the nation's larger financial institutions had shunned.

Although the law has been effective in some respects, there were complaints from consumer groups that the method for evaluating a bank's lending activity was too lenient. While it is difficult to measure how much discrimination has been going on, numerous studies, including one from bank regulators, reported that minority applicants for home mortgages, for instance, were denied loans at a higher rate than whites even when other social factors were considered.

Banks did not like the law and its regulations because they required excessive paperwork.

Under the newly proposed standards, regulators would evaluate banks based on specific lending and market-share data that would measure actual lending. But they would not set fixed credit quotas. The proposal is subject to further review and debate for two months but faces no major opposition and requires no congressional action.

Yesterday, consumer groups and banking organizations, which have not seen eye to eye on lending regulations, praised the central elements of the administration's plan, although each side found something to criticize in the details.

The administration, which promised the changes months ago, has been pressing on several fronts to increase bank lending in poor and predominantly minority communities.

The issue of fair credit has been prominent in recent years, as several major studies have shown that despite laws and regulations aimed at the problem, banks have failed to provide equal credit opportunities.

Eugene A. Ludwig, comptroller of the currency and the administration's leading advocate of fairer lending practices, said at a White House briefing that the new approach emphasized "performance over paperwork."

All four federal banking agencies are expected to issue similar rules. But some members of the Federal Reserve Board, which plays a crucial role in enforcing the law, are less enthusiastic than some of the other agencies about the new approach, a fact that is likely to emerge at the board's meeting on its proposed regulations tomorrow.

Deepak Bhargava of Acorn, a national group that lobbies for lending and housing reform, said yesterday that "the Fed appears to have won many of the key battles in the fights among agencies over these rules. I would almost characterize their efforts here as obstruction of the president's efforts. I would call them the George Wallace of CRA reform, blocking the door to getting something done."

In particular, the Fed has opposed the collection of racial data on small-business loans, as is done already with mortgage loans. Advocates of more-aggressive enforcement of the fair-lending law called this an important gap in the proposed new rules.

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