Congress and the Bank Modernization Legislation: Changing the U.S. Banking Industry

John Taylor, President and CEO, National Community Reinvestment Coalition

As Congress debates "modernizing" the nation's banking laws, one obvious downside will be the bill's negative impact on the new civil rights movement: economic justice. The economic justice movement, which seeks to democratize access to credit and capital and build wealth in low-income and minority neighborhoods, is weakened by this bill in favor of serving the interests of banks, securities firms and insurance companies.

The foundation for the economic justice movement, the Community Reinvestment Act (CRA), has come of age only in this past decade. Contrary to the perspective of some analysts, the CRA universe is growing, not shrinking. According to the Federal Reserve System, CRA-regulated institutions in 1989 controlled $3.9 trillion dollars. In 1999 that figure rose to $5.3 trillion – an increase of $1.4 trillion in only one decade. More relevant to the National Community Reinvestment Coalition (NCRC) and others is the fact that these CRA loans and investments are finding their way into poor communities like never before. [See Shelter Shorts]

Given this good news, it seems odd that Congress would seek to derail the Community Reinvestment Act. But that is precisely what Congress is now considering.

On the Senate side, Banking Committee Chairman Phil Gramm (R-TX) has taken aim at CRA, calling community groups "extortionists," and CRA lending "credit allocation." Sen. Gramm has successfully passed three CRA-gutting provisions in his version of bank modernization, S. 900, The Financial Services Modernization Act of 1999. Below is a summary of those provisions, along with comments on each:

1) Public comments in the merger process could not be considered unless a member of the public could show substantial new information convincing a federal regulatory agency to change a passing CRA rating to a failing grade.

Lenders who violate CRA face no penalty or legal remedies. A major time for CRA enforcement occurs during the merger process. Mayors, community groups, religious leaders, and others have spoken at these merger moments to insure future commitments by lenders to their respective neighborhoods. This provision would prohibit federal regulatory agencies from considering such comments.

2) Small banks (under $100 million in assets) in rural America would be outright exempted from CRA coverage and have no obligations under CRA

Rural America continues to take it on the chin from the 106th Congress. NCRC has calculated that 3,876 of 5,375 – or 72 percent – of rural banks and thrifts would be exempt under this door-opening provision, which erodes the very purpose of the CRA.

3) Community groups and lenders that reach CRA agreements in which more than $10,000 changes hands would be required to report their activities to the bank regulatory agencies and make public their CRA agreements.

This provision would not only impose a significant burden on small community groups but would have a chilling effect on lenders' willingness to sign CRA agreements. Often these agreements constitute a marketing strategy to serve certain segments of the bank's assessment area, something most lenders would prefer not to share with competitive lending institutions.

After the Senate passed its bank modernization on a partisan vote May 6, the focus shifted to the House, where a very different Republican Banking Committee Chairman, Jim Leach, has not only opposed CRA-gutting legislation but has actually supported expanding CRA in some ways.

Chairman Leach managed to get more consensus from his committee on H.R. 10 "The Financial Services Act of 1999." This bill was passed by a majority (51-8) of Democrats and Republicans on his committee.

While the House bill contains none of the Senate bill's CRA-gutting provisions, it still weakens CRA lending by promoting increased concentration of assets and creates no community reinvestment obligations for the new entrants to the banking business: insurance companies and securities firms.

Because of this, NCRC is asking community leaders and members of Congress to oppose H.R. 10. On June 10, NCRC participated in a Black and Hispanic Congressional Caucus press conference on the steps of Congress to call for a banking bill that considers low-income and minority community needs. NCRC and some 25 Congress people called for modification of the bill to include Rep. Luis Gutierrez's (D-IL) amendments that would:

require insurance company affiliates of banks to disclosure data on the race and income of their policyholders, and;
expand CRA to cover any non-bank affiliate – including insurance companies, mortgage companies, securities firms, and others – that is lending or offering other banking services.

NCRC and its 700 member organizations are working to save CRA and expand the universe of institutions that loan safely and soundly to low-income and minority borrowers, and we urge all people interested in neighborhood revitalization efforts to do the same. We expect Rep. Luis Gutierrez's amendments to be offered on the House floor during debate on this bill at the end of June or in early July. President Clinton has promised to veto any bank modernization legislation that weakens CRA. Let's work to get the Gutierrez amendments adopted. Failing that, let's send financial modernization legislation back to the drawing board for another day.

For more information on this legislation and CRA, contact NCRC, 202-628-8866.

Back to May/June 1999 index.