Redline redux

October 20, 2004

REMEMBER REDLINING, circa 1970? We may soon see a modern-day version of the old practice when banks drew invisible but detrimental geographical boundaries around poor urban and rural areas and refused to do business with them. Recent moves by the Federal Deposit Insurance Corp. (FDIC) and other banking regulatory agencies to water down a nearly 30-year-old law designed to ensure that banks provide lending, investment and basic banking services to poor communities are prompting fears of a return to the old days.

Proposed changes to the Community Reinvestment Act (CRA) would essentially weaken the requirements on banks regulated by the FDIC, and exempt more of them from most CRA rules by raising the asset ceiling for "small banks" from $250 million to $1 billion.

Exempt banks would no longer be required to provide investment and banking services to their constituencies, which could mean less investment in low-income communities for small business loans, or fewer economic development projects such as youth community centers, or even the discontinuation of banking services such as low-cost checking accounts.

The rule changes would affect about 1,000 banks and thrifts across the country with approximately $384 billion in assets. The comment period for the proposed rule change ends today. Opponents say the changes would undermine inroads made since the law was passed in 1977, bringing thousands of poor blacks, Hispanics, rural whites and immigrants into the economic mainstream over the years. They say the change would allow any service the banks provide to rural areas - such as financing a golf course for a country club - to count toward meeting the CRA requirements. The FDIC counters that so would financing public libraries and water purification systems.

The American Bankers Association and the Maryland Bankers Association favor the change. The congressional black and Hispanic caucuses strongly oppose it. Maryland Sen. Paul S. Sarbanes, the ranking Democrat on the Senate banking committee, is galled that the FDIC board issued the proposal in August while Congress was out and only allowed a 30-day comment period, a departure from past practices that allowed 90 days. He notes that the FDIC acted after the other regulatory agencies - the Federal Reserve Bank, the Office of Thrift Supervision and the Office of the Comptroller of the Currency - which usually act in concert, failed to reach a consensus on a joint proposal that would have raised the threshold to $500 million.

The Thrift Supervision Office has already adopted the same measure that the FDIC is proposing, purportedly to streamline burdensome regulations and free up small banks to concentrate resources strictly on lending. But in fact, this measure would undermine the incentive for banks to invest in poor communities, unravel the tradition of reinvestment and divert critical resources from these communities.

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