Color Blind Credit: How The Banks Can Do BetterMike Mcnamee
Fifteen years ago, Senator William Proxmire had a simple idea: The Wisconsin Democrat reasoned that banks and thrifts, granted charters to collect federally insured deposits, had an obligation to return a significant portion of those funds to their neighbors in the form of loans. That idea blossomed into the Community Reinvestment Act of 1977 (CRA). It gave regulators the power to block a bank's requests to expand or merge unless the institution can show that it has tried to meet the credit needs of all constituencies--rich and poor, black, brown, and white--in its service area.
Unfortunately, CRA has spawned a far-from-simple regulatory mess that satisfies no one. While more than 85% of all banks win "satisfactory" or "outstanding" ratings from regulators on CRA examinations, it's clear from available data that CRA has been far from successful in wiping out "redlining" of poor or minority neighborhoods or racial discrimination in lending.
Federal Reserve data on mortgages show that a low- to moderate-income white applicant had a better chance of getting a loan in 1990 than did even a high-income black (table). And while regulators don't gather comparable data on business lending, the Los Angeles riots showed that lack of credit is a major barrier to business growth in minority neighborhoods.
FAT FILES. The wide gap between banks' efforts to comply with CRA and actual achievements stems from the law's basic weakness. Proxmire was, quite rightly, leery of giving regulators the power to dictate how much, where, and to whom banks should lend. So the CRA superstructure built over the years focuses on paperwork, not results. Banks churn out fat reports that document their contacts with community groups, marketing to various populations, directors' involvement in passing CRA resolutions--everything, that is, except the extent to which they actually make loans available.
How can CRA be fixed? Given the sheer size and diversity of the banking industry and regulators' preference for cookie-cutter rules, it's best not to try to design a nationwide system of CRA credit standards. Instead, regulators should use their present tools to turn up the heat on institutions that don't meet their local customers' needs.
The first step is gathering accurate information. Regulators still don't know whether lending patterns are being driven by racial prejudice or legitimate economic factors such as credit ratings, so it's impossible to tailor an enforcement effort. There have been some moves in the right direction. For example, the Boston Fed is asking 132 banks for details on applicants' credit and employment histories to determine whether high minority rejection rates in the 1990 mortgage data were based on economic or racial factors.
The regulators should then focus on improving CRA examinations. A 1989 amendment to the law required regulators to rate banks in 12 areas, ranging from participation in government-backed lending programs to direct evidence of discrimination. But critics complain that these reports are long on rhetoric and short on hard data. "Now, the CRA report is written to justify the examiner's conclusion--not to provide data we can compare from bank to bank," complains Allen Fishbein of the Washington-based Center for Community Change.
BASIC CHOICE. Regulators should also consider tougher sanctions. They should be more aggressive in using the leverage CRA allows over banks seeking expansion. Even with high CRA ratings, NationsBank Corp. and BankAmerica Corp. agreed to plow more than $20 billion into community-based lending to facilitate their respective mergers. For smaller banks that don't plan to expand, regulators may need new powers--including fines--to force compliance.
Banks, of course, aren't the only parties to blame. Mortgage lending can be stymied by discrimination by insurers and appraisers. Housing agencies such as the Housing & Urban Development Dept. need to direct research to identify those factors and expose them to public pressure. The secondary market for mortgages is also crucial. While the Federal National Mortgage Assn. is well on its way to meeting its goal of $10 billion in "community-based" loans, Fannie Mae should also be required to put some of the vast profits it earns under its government charter into subsidies for low-income borrowers.
In the final analysis, though, only a direct commitment by banks to a fair, color-blind system of credit will make CRA live up to Proxmire's high hopes. And that means banks have a fundamental choice: They can create that system themselves, or they can wait until public anger forces Washington to impose it on them.