Zeev's Turnips Talk Politics (ZTTP)

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U.S. Set to Alter Rules for Banks Lending to Poor
By DAVID W. CHEN

Published: October 20, 2004
ederal banking regulators in the Bush administration are poised to limit the nation's primary law requiring small banks to serve low-income residents in their own neighborhoods through housing investments and development projects.

Since 1977, the Community Reinvestment Act has required banks with assets of more than $250 million to satisfy stringent tests gauging their banking services to low- and moderate-income residents. Because of that obligation, housing groups say, banks have channeled $1.5 trillion into housing, medical clinics and other projects. But many small banks have complained about being sapped by the time and money needed to comply, and also of being overmatched by the resources of larger banks.

So in recent months, two of the nation's four bank regulators - the Office of Thrift Supervision and the Federal Deposit Insurance Corporation, both headed by Bush appointees - have published formal proposals seeking to reduce the number of banks subject to the law. Under the proposal, only banks with $1 billion in assets would have to comply, meaning that 1,100 smaller banks would be subject to less scrutiny. The thrift office has already put its proposal into effect; the F.D.I.C. is a few months away from acting, although today is the deadline for public comment on the plan.

The two other bank regulators - the Office of the Comptroller of the Currency and the Federal Reserve Board - appear inclined to loosen their rules as well.

The F.D.I.C. proposal alone would mean that the number of banks required to comply with the toughest provisions of the law would drop to 227 from 1,138. In New York, the number is estimated to decline to 20 out of 81; in New Jersey, 12 out of 76. Some states, like Minnesota, New Mexico, Idaho and West Virginia, are projected to drop to zero.

The law's detractors say that while the Community Reinvestment Act may have initially been a well-intentioned response to limits on loans in poor neighborhoods, it has become irrelevant because small banks now recognize that community reinvestment is critical for their survival. In addition, these critics point out that through consolidation and inflation, the average size of banks has grown since the law's inception, so that the change does not substantially affect the amount of bank assets covered by the law.

The debate on the changes has become so intense that it has reached the presidential race. Vice President Dick Cheney demurred when asked about the proposed changes in August at a campaign rally in Iowa. But last month, Senator John Kerry said that he strongly supported keeping the law in its current form, and accused the Bush administration of choosing "favors for special interests over opportunity for millions of average Americans."

The law's critics say it has forced small banks to struggle to stay afloat, putting them at a competitive disadvantage with large banks more adept at complying with the law.

"Community banks are an endangered species, and they are drowning in a sea of regulation," said Representative Jeb Hensarling, a Republican from Texas who sponsored a bill this year to raise the threshold to $1 billion. "I'm not completely certain what purpose C.R.A. serves, period. If there are people who would like to repeal it, I would talk to them."

But many Democrats, larger banks and rural organizations say the Community Reinvestment Act has arguably been the nation's most significant community revitalization initiative. Before the law, many banks engaged in discriminatory red-lining practices by choosing not make mortgage and business loans to people in poor and predominantly minority neighborhoods. After the law, banks were held accountable to a higher and tougher standard, forcing them to actively pursue lending, investment and other activities in poor areas.

In New York, for instance, the law has been instrumental in financing a Pathmark on 125th Street - the first full-size supermarket in Harlem - and the Harlem USA shopping area, as well as the rehabilitation of hundreds of dilapidated apartments in upper Manhattan, the Lower East Side, the Bronx and Chinatown.

These supporters have accused regulators of acting capriciously in unveiling their proposals, and limiting or even eliminating the public comment period. But they are angriest at what they contend is a broader design to dismiss the housing needs of poor people, pointing to proposed cuts to the Section 8 voucher program.

"It's all part of a strategy," said Senator Paul S. Sarbanes of Maryland, the ranking Democrat on the Banking Committee. "This administration has no commitment to affordable housing."

http://www.nytimes.com/2004/10/20/nyregion/20bank.html?hp&ex=1098331200&en=bfd23bae2e3b076e&....