Gramm holds bank reform hostage over loans to poor

Overhaul of system may die over his bid to curb popular CRA law

Powerful senator exerts will

April 30, 1999|By David Folkenflik | David Folkenflik,SUN NATIONAL STAFF

WASHINGTON -- Listen to urban activists talk about the 22-year-old law that directs banks to make loans in distressed neighborhoods, and you'll hear rhapsodies about how well lenders do by doing good.

Listen to Sen. Phil Gramm of Texas, the new chairman of the Senate banking committee, talk about the same requirements, and you'll hear a single word: "Extortion." And Gramm is willing to tie up major banking reform in an effort to do something about it.

"Phil's a strong leader," said Sen. Rick Santorum of Pennsylvania, a fellow Republican on the banking committee who is more supportive of the community lending laws. "He'll fight very hard to make sure his views are considered. This is going to be a tough process."

The Community Reinvestment Act of 1977 (CRA) was intended to prevent banks from refusing to lend money in entire neighborhoods and rural areas on the basis of race and income.

Since then, banks have committed about $1 trillion in loans and investments -- about $173 million of it in Maryland -- in lower-income communities.

Though some bankers grumble that the law creates wasteful busywork, others say they have been introduced to new, usually profitable, loan customers.

"What you see with us is a bank that has made a very good business out of [the law]," said Torod Neptune, Bank of America's vice president for corporate affairs.

Last summer, as Bank of America and NationsBank sought government approval of their proposed merger, they promised $350 billion in loans in lower-income areas over the next 10 years. "We see it as a community-driven strategy," Neptune said.

Gramm detects something more sinister in the Community Reinvestment Act. The legislation, he contends, has spawned an entire industry of activists who demand payoffs from banks in exchange for remaining silent about the banks' lending practices.

Far from encouraging collaboration, Gramm said, the pacts between banks and nonprofit groups demonstrate a new form of "extortion" by community activists.

"The Democrats have taken the view that even where abuses exist, they refuse to deal with it," Gramm said. "That's an extreme view."

As early as next week, the Senate is poised to consider legislation that would break down the Depression-era Glass-Steagall Act which separated banks, insurance companies and securities firms.

Both parties favor many of the changes, now contained in House and Senate bills.

But the Senate version, championed almost single-handedly by Gramm, would also significantly weaken the community lending requirements. Among other things, it would exempt many small community banks -- about two-thirds of all U.S. banks.

Arrayed against Gramm are Senate Democrats, many House Republicans and President Clinton, who has promised a veto of the Senate version, thus reducing the likelihood that any major banking reforms will be passed this year.

A meeting yesterday between Gramm and Sen. Paul S. Sarbanes of Maryland, the committee's senior Democrat, yielded nothing beyond an agreement that the Gramm bill could be considered by the full Senate as early as Monday.

Sarbanes hails the community investment laws for promoting homeownership and small business development in neighborhoods around Baltimore.

"The financial institutions, by and large, have indicated that they can accommodate the CRA provisions that we've created," Sarbanes said.

He argues that banks, whose customers' deposits are insured by the federal government -- ultimately with taxpayers' money -- should be required to serve the communities where they have branches.

Many bankers are uneasy about the prospect that Gramm's demands will delay fundamental banking reform.

"To me, if you've got to pick one or the other, why, the overhaul of Glass-Steagall would be it," said Bill Knott, First Union's regional president for Maryland.

After a history of conflict with activists in other states, First Union signed an agreement with the Maryland Center for Community Development to target $36 million over the next three years in short-term loans, and $45 million for first-time homeowners at below-market rates. In addition, the bank will give $6,000 annually to the community development center to cover its costs.

House Republican leaders appear to support a banking overhaul measure similar to the Sarbanes alternative. The House reform would, for the first time, impose fines on officers of banks that fail to meet community lending guidelines and would extend the requirements to new financial conglomerates. This version sailed through the House banking committee on a 51-8 vote.

"I would do anything in my power," Gramm said, "to defeat it."

Gramm is a commanding presence with a booming drawl that can be heard through the Capitol's corridors advocating unfettered trade, lower taxes and relaxed regulations on businesses.

His presidential ambitions now shelved after a brief foray in the 1996 Republican primaries, Gramm has staked out a consistently conservative line on economic policy.

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