New York Times October 23, 1999 NEWS ANALYSIS
Big Gains by Gramm in Diluting Lending Act
By RICHARD A. OPPEL Jr.
Community-lending advocates and banking industry officials found one thing to agree on Friday about the rewrite of the Community Reinvestment Act: It is not going to improve lending in poor neighborhoods.
After long negotiations on legislation to overhaul the nation's financial services laws, Senate Republicans and the Clinton Administration resolved their differences early Friday over whether to strengthen or weaken the law involving lending to minorities and others commonly denied credit.
The law's chief critic, Senator Phil Gramm, Republican of Texas, appeared to get much of what he wanted. Gramm not only secured reductions in how often small banks would have to face compliance examinations, but he also won a provision requiring his ideological adversaries, the community advocacy groups, to disclose how much they receive from reinvestment agreements with banks.
Gramm has said the groups use these agreements to "extort" money from banks by dropping objections to mergers or expansions in exchange for payments. Community groups say that the agreements are an important part of insuring better access to credit in poor areas and that fewer banks will agree to them if the details have to be disclosed.
By comparison, a provision trumpeted by the Clinton Administration failed to impress many low-income-lending advocates. The Administration, which had threatened to veto any measure that weakened the community lending law, inserted language barring institutions from expanding or buying an insurer, brokerage firm or bank unless all their affiliated lending institutions have satisfactory ratings on fair lending. Clinton said the new provisions will "promote continued investment in America's communities."
But critics pointed out that the deal includes no penalties for banks that fail to maintain satisfactory grades. Moreover, they said, the forces that have lobbied hardest for the bill are among the biggest lending institutions in the country, and they almost never receive unsatisfactory community-lending ratings.
"In their desire to please the financial industry, the Administration has agreed to substantially reduce the impact of C.R.A.," said Chris Saffert, a legislative representative for the Association of Community Organizations for Reform Now. "Phil Gramm completely walked over the Administration. And for them to be saying this is a good bill is a poor reflection on their priorities."
The deal struck on Friday also allows banks with less than $250 million in assets to undergo a community-lending compliance examination once every five years if their last exam resulted in an "outstanding" grade, and every four years if they last scored "satisfactory." Under current law, examinations are required every 18 months.
Community groups expressed concern, saying that this change would allow many institutions to finesse the examination process by sloughing off community-reinvestment loans in most years, as long as they take them seriously in the period leading up to an examination.
John Henneberger, director of the Texas Low Income Housing Information Service, said a study of 89 Texas banks that failed exams from 1990 to 1995 found that 87 had less than $250 million in assets. But he said the study also showed that most of those quickly improved their lending practices after their bad ratings, demonstrating that vigilant oversight of small banks is effective.
"Communities that rely exclusively on small banks to provide mortgage credit are having the same hard time as inner-city folks," Henneberger said. "The numbers are very close."
Steve Scurlock, executive vice president of the Independent Bankers Association of Texas, said the changes would not hurt small-town lending. The study's findings are not surprising, he said, given that more than 90 percent of Texas banks have less than $250 million in assets.
"The overwhelming majority of community banks do a very credible job of serving their community," he said, "which has a direct relationship to the well-being of banks over the long term."