Reinvestment act good for banks and communities

April 19, 1999|By Bart Harvey

CHERYL Johnson believes in the power of prayer. While raising her children as a single parent, she prayed to realize her lifelong dream of owning her own home.

For Ms. Johnson's family and other Baltimore residents, this dream of homeownership has become a reality, thanks to a partnership between a local nonprofit, the Druid Heights Community Development Corp. and the community development arm of NationsBank.

These two entities joined to turn several blocks of abandoned and boarded-up properties in Druid Heights in West Baltimore into a planned townhouse community.

NationsBank offered profitable but below-market loans and flexible terms to make the project work. The nonprofit has already sold 12 of the 14 houses that will be built. With such a partnership, everyone wins. Ms. Johnson gets her own home. The urban neighborhood gets a boost. The nonprofit's plan to overhaul the neighborhood begins to take shape. The bank makes money.

The federal Community Reinvestment Act or CRA helped this dream become a reality. The act is little known outside the banking industry, yet it has been a powerful force for positive change. The law was enacted to ensure that minority communities were not discriminated against in lending, a practice known as "redlining."

Considering the whole

CRA does not require banks to make loans in particular places or to subsidize unprofitable businesses, but it does require a bank to consider its entire community when making lending decisions.

Under CRA, banks receive ratings from the various bank regulatory agencies on how well they serve low- and moderate-income areas. These ratings are public information.

In recent years, CRA has had its regulations simultaneously streamlined and toughened. The Clinton administration has eliminated paperwork requirements and made the actual analysis of banks' lending and investments more meaningful.

This process is still not very rigorous. About 98 percent of the banking industry receives a "satisfactory" or "outstanding" rating. Nevertheless, CRA has made banks consider business opportunities in under-served areas and has resulted in large increases in bank investments in poor communities.

This is an example of government regulation creating a winning situation for banks and communities, with no cost to taxpayers. CRA has shown banks good business opportunities that they otherwise would have missed.

Unfortunately, the new chairman of the U.S. Senate Banking Committee, Sen. Phil Gramm, a Texas Republican, has CRA in his gun sight. His Web page lists stopping expansion of CRA as one of his accomplishments in the last session of Congress.

Rolling back the law

In fact, a bill just reported from his committee goes beyond simply limiting the expansion of CRA and actually rolls back some of its provisions.

The basis of Mr. Gramm's opposition to CRA is that it allows community groups to "extort" contributions from the banks as a condition of regulatory approval of bank mergers.

It is certainly a stretch to imagine the U.S. banking industry, which earned a record $47.1 billion in the first nine months of 1998, as the victim of all-powerful neighborhood groups. But let's examine the record on this point.

According to the Federal Reserve Board, one of the agencies that administers CRA, from 1993-1997, there were about 1,100 bank merger applications subject to CRA each year.

Of these, community groups raised substantive CRA objections to fewer than 70 applications, and, on average, less than 10 per year were either denied or withdrawn for CRA reasons.

The image that Mr. Gramm describes of large numbers of banks being "held up" to have their merger applications approved is simply not supported by the facts.

It is interesting to note the arguments CRA opponents are not making. No one has suggested that U.S. banks have lost money by lending money to residents of poor areas.

However, banks have lost money on lending overseas, commercial real estate ventures, derivatives trading and a host of other speculative activities. There is no evidence that "helping to meet the credit needs of the entire community" (the words of the CRA statute) has ever caused a bank to fail.

Results oriented

The practical results of CRA are impressive, indeed. An entire generation of community investment professionals has emerged who are providing banking services to under-served areas in a profitable way.

Their impact has both an economic and social return.

Attempts in Congress to diminish or disable this law are misguided.

Lending and investment in low-income neighborhoods is neither glamorous nor easy, but partnerships between banks, neighborhood groups and local governments are rebuilding communities all over America, block by block.

Bart Harvey is chairman and chief executive officer of the Enterprise Foundation, which collaborates with a variety of banks on investments in community development projects in low-income neighborhoods across the country, including the Druid Heights development.

Pub Date: 4/19/99

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