Investing in communities Bank loans: Law has made it easier for residents of low-income areas to get credit.

March 15, 1996

AFFIRMATIVE ACTION critics in Congress want to exempt most banks from the Community Reinvestment Act. But inner-city neighborhoods need this nine-year-old law, which gives federal regulators the power to deny mergers or new branches to any bank that has a poor record of lending in a community where it takes deposits.

Home loan approvals to African Americans increased by more than 38 percent in 1994 when compared to the previous year. Loan approvals for Hispanics also increased, 31 percent, while the approval rate for whites grew by 12 percent. Monitoring through the Community Reinvestment Act and associated federal rules that require banks to publicly disclose the race and income of every successful loan applicant played a huge role in ** these improvements.

CRA is not a panacea. African-American loan applicants still get rejected at about twice the rate of whites, which in part reflects the differences in the credit histories and indebtedness levels of typical applicants from those two groups. But CRA has heightened the sensitivity of banks and caused them to aggressively seek loan applications from minorities so they may in turn increase the number of loans granted.

Banks don't want a bad CRA rating. To pave the way for their pending $10 billion merger, which would be the largest in U.S. history, Chemical Banking Corp. and Chase Manhattan Corp. have announced a five-year, $18 million program to boost the number of loans in poor communities. NationsBank and other acquisition-oriented financial institutions have also announced loan programs that will improve their CRA ratings and remove that potential barrier to planned mergers.

The Community Reinvestment Act has not been applied heavy-handedly. In fact, the General Accounting Office says only 17 of 41,311 bank merger applications have been turned down since 1989. But the stick is there to be applied when necessary and that's important. Before CRA, banks made little effort to make loans in poor communities, saying the risks were too great. Now they go out of their way to make loans in those neighborhoods, helping to stabilize them and improve the quality of life for people who too frequently are neglected.

Pub Date: 3/15/96

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