Editor's note: The following is from American Banker's "Viewpoints" section.

Don't Let Its Enforcers Weaken the Community Reinvestment Act

By: John Taylor *
American Banker, 5/14/04 -- WASHINGTON -- The Community Reinvestment Act, originally a partisan issue, has garnered bipartisan support. There is now agreement that a community's wealth can be reinvested in that community safely and soundly. CRA loans get paid back.

Today the CRA faces its greatest challenge from those delegated to enforce it. The former Texas and California small bankers who now head the Federal Deposit Insurance Corp. and the Office of Thrift Supervision are leading the charge to weaken a law that says banks have "affirmative and continuing obligations" to serve communities.

OTS Director James Gilleran and FDIC Chairman Donald Powell are proposing to weaken CRA enforcement at over 1,100 financial institutions with assets of $250 million to $500 million. They would no longer be subject to the existing CRA tests, including a review of their community development lending or investments and their history of opening and closing branches in low- and moderate-income communities.

Thirty percent of the banks in Massachusetts -- 60 out of 211 -- would no longer be covered by the full CRA exam. The figure would be 39% in Idaho, 32% in Maine, 28% in New Hampshire, 29% in Virginia, 22% in Pennsylvania and Maryland, and 21% in New York. Nationwide, over $387 billion in bank assets would be removed from the comprehensive CRA exam process.

Contrary to the contentions of FDIC Vice Chairman John Reich [April 30 letter to the editor], this would stall "the momentum of community development in our cities and rural areas."

In a sample of CRA exams that my organization, the National Community Reinvestment Coalition, studied, 40 banks and thrifts with assets of $250 million to $500 million made $162 million of community development loans and investments over the two-year exam cycle. Extrapolation suggests that the more than 1,100 midsize banks make about $4.5 billion in loans and investments every two years in low- and moderate-income communities.

We also found that banks rated "outstanding" and "high satisfactory" did more than twice as much community development investment and lending than banks rated "low satisfactory" and "needs to improve." It is therefore reasonable to assume that all the midsize banks would perform at these lower levels, reducing their community development lending and investment by half or more, if the regulators cut out the community development and lending tests.

Nor would the proposed changes alleviate some "paperwork burden." Regulators have been streamlining CRA compliance for several years; Charlotte Bahin, senior vice president at America's Community Bankers, stated publicly at a FDIC session on the Economic Growth and Regulatory Paperwork Reduction Act that small banks no longer complain about the CRA exam process.

The federal agencies could have really helped meet credit needs if they had proposed a meaningful anti-predator standard instead of the incomplete and weak standard imported from the preemption ruling of the Office of the Comptroller of the Currency. That standard fails to address exorbitant fees, onerous prepayment penalties, single-premium credit insurance, mandatory arbitration, and numerous other abuses.

Ironically, the much-maligned Department of Housing and Urban Development and the government-sponsored enterprises have both addressed these abuses in their rulemakings and through voluntary pledges.

And instead of streamlining exams, the regulators could have required the inclusion of mortgage company affiliates of banks on CRA exams and subjected them to a rigorous anti-predator standard.

President Bush, Federal Reserve Chairman Alan Greenspan, and Comptroller John Hawke should rein in their counterparts at the FDIC and OTS and end their proposal to weaken CRA enforcement. Those charged with enforcing the law ought to be proposing efforts to expand, not reduce, its effectiveness.

*Mr. Taylor is the president and chief executive officer of the National Community Reinvestment Coalition in Washington, whose members are 600 community organizations