Potentially the biggest event in the community investment arena in years was previewed last week when the Clinton administration announced its proposed reforms to the Community Reinvestment Act (CRA). As drafted, the 1977 law couldn't be simpler:
A lending institution was to be evaluated according to its "record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods."
But instead of focusing on a bank's results -- i.e., how many dollars make it into the pockets of people in poor neighborhoods -- the CRA in practice has centered more on a bank's ability to keep up with copious amounts of paperwork.
"The rating system seems to be equivalent to rating Cal Ripken on how often he shows up and swings the bat, rather than how often he hits the ball," says Tom Chalkley, director of the Maryland Alliance for Responsible Investment (MARI), a coalition of affordable housing and fair-lending groups.
The new rules would establish three broad tests for every institution with more than $250 million in assets:
* Lending: primarily, how a bank's market share of consumer, small business and mortgage loans in low- to moderate-income neighborhoods compares with its overall market share.
* Service: the number and locations of an institution's branches. (Only outstanding or dismal ratings would affect a bank's overall score.)
* Investment: to what degree an institution invests in community development corporations, minority- or female-owned banks or thrifts, affordable housing organizations and the like. (Only a strong score here would affect the overall CRA rating; a poor performance would be ignored.)
Institutions with less than $250 million in assets would be allowed to opt for a more streamlined test, and could choose to be rated on the broader scale if they fail that streamlined test.
Other major differences: Banks would have to report their results for mortgage, consumer and small business lending, and regulators would be authorized to impose monetary penalties for noncompliance.
NationsBank Corp., Maryland's biggest banking company, had offered its two cents to the regulators drafting the proposals, and the company says it's overjoyed with the results.
"While it will make our paperwork burden easier, it will make achieving an outstanding rating tougher," says Catherine Bessant, a NationsBank senior vice president and director of community lending. "It is a night-and-day difference," she said of the plans, "a revolutionary change."
Not everyone is comfortable with change, of course.
"We certainly like a lot of the concepts embodied in there," said John Bowers, director of the Maryland Bankers Association. But some bankers fear the new regulations could create quotas for low-income loans that might squeeze other worthy borrowers out of the market. "There's a finite amount of credit to go around," he said.
Mr. Bowers also noted that the disclosure requirements could be too costly for all but the biggest banks.
Mr. Chalkley, on the other hand, is feeling good these days. The CRA reform proposal is "a positive shift of direction. I think they really have tried to incorporate 15 years of what works and [remove] what doesn't work in CRA," he said.
Still, the proposed reforms face opposition, and he's not ready to dissolve MARI, which has used the CRA to pressure banks to sign lending agreements.
"There's no reason for anybody who's a community advocate to fall asleep and think that President Clinton's going to take care of things," Mr. Chalkley warned.