Taking A Sharper Look At Bank Examiners

Community activists have maligned the banks for years, charging that they don't do enough lending in poor and minority neighborhoods. But is the problem only with the banks themselves? Or should the regulators charged with monitoring community lending shoulder some of the blame? A growing number of activists, congressional representatives, and banking experts think it's the latter.

Much of the debate focuses on the 1977 Community Reinvestment Act (CRA), which was aimed at deterring redlining. Regulators such as the Federal Reserve Board defend their enforcement of the CRA and other fair-lending laws, but critics can marshal plenty of evidence suggesting otherwise. Congressionally mandated studies of home-mortgage lending over the past two years suggest there is a sharp discrepancy between banks' actual minority and low-income lending and the ratings they got from regulators.

What's more, a report by the Federal Reserve Bank of Boston released in October found that mortgage applications from blacks and Hispanics are 60% more likely to be turned down than those from whites with similar incomes. Yet nearly 90% of commercial banks receive "satisfactory" or "outstanding" ratings from regulators under the CRA. "The problem with the CRA is not that the law is ineffective. It's that enforcement is inadequate. Regulators have done a terrible job," says Representative Joseph P. Kennedy II (D-Mass.), chairman of a House banking subcommittee.

COOKIE CLOUT. Regulators apparently have lots of leeway in the ratings they assign: A Senate Banking Committee report last November found that one bank was awarded a high score partly because it offered to advance $60,000 to local Girl Scout troops to buy cookies for their annual fund-raiser. Another was praised for freeing up employees to wash windows at local schools. Regulators fail to "distinguish between charitable activities and CRA activities," the report concluded.

Miami banking consultant Kenneth H. Thomas, who has a written a soon-to-appear book based on reviews of 10,000 CRA reports, says the reports "are the worst indictments of the agencies themselves." According to Thomas, Georgia's Decatur Federal Savings & Loan Assn. was awarded a satisfactory CRA rating even though the Justice Dept. was investigating it for alleged racial discrimination in its mortgage lending. Decatur settled the charges last September by paying $1 million to rejected applicants.

If regulators lacked enforcement powers, that would be one thing--but they don't. When banks have poor CRA records, regulators can reject their bids to acquire other banks or build new branches. That power has been little used, however. Regulators have received 70,000 such requests since 1977 but nixed only 20 for poor CRA performance. Just last month, the Fed approved an acquisition by First Commercial Corp. in Little Rock that the Comptroller of the Currency had denied only four months earlier because of the would-be acquirer's record on low-income and minority lending, according to Thomas. Such actions "send a clear message to the rest of the industry that low CRA ratings really don't matter," he says.

NEW TUNE. Growing criticism from Congress and activists, as well as President Clinton's interest in boosting lending, may force regulators to change their tune. "I expect regulators to become more emphatic and forceful about CRA," says financial consultant Edward E.Furash.

Surprisingly enough, some bankers seem amenable to a change in the CRA rules. They say the review and grading process focuses too much on paperwork and too little on results. Where credit actually goes is hardly an issue. Some lenders say they would welcome any reform that made their community obligations clear. "We have proposed that banks subject to New York State regulation submit a CRA plan with lending goals and be held accountable for it," says Carol J. Parry, managing director in charge of community development at Chemical Banking Corp.

Some states are already proposing modifications to their CRA regulations. In New York, regulators have proposed new rules that would set more detailed performance standards for state-regulated banks under the state's own CRA law.

In defense of their performance, Washington regulators note that CRA obligations aren't the only consideration in merger reviews. For example, they say, a deal shouldn't be derailed for CRA reasons if a healthy bank is buying a seriously troubled one and thereby improving the safety and soundness of the overall banking system. Regulators also argue that high-profile battles between banks and community activists are relatively rare. "I really think that most banks are doing a pretty good job serving their communities," says Ken A. Quincy, a chief examiner for the Federal Deposit Insurance Corp.

But under the new Administration, bankers may be expected to deliver more to minority and low-income neighborhoods. Clinton's newly appointed Comptroller of the Currency, Eugene A. Ludwig, says his examiners will "have to place more emphasis on CRA and fair-lending compliance. Fair lending matters to me a lot." Tough enforcement of the CRA may be another way for the Clinton Administration to ease the credit crunch in places where it has hit hardest--the communities of the working poor.

WHAT'S WRONG WITH CRA REGULATION
      REGULATORS DEVOTE INSUFFICIENT RESOURCES  Fewer than 40 of the 2,600 examiners 
      at the Comptroller of the Currency monitor compliance with CRA and other 
      consumer lending rules full time
      FEW BANKS GET BAD MARKS  Despite a government study showing that minorities are 
      rejected for home loans more than twice as often as whites of the same income, 
      nearly 90% of all banks have received CRA ratings of satisfactory or better
      REGULATORS RARELY PENALIZE ERRANT BANKS  Of nearly 70,000 applications by banks 
      to expand, only 20 have been denied by regulators on CRA grounds
      DATA: SENATE BANKING COMMITTEE, BANK COMMUNITY REINVESTMENT IN AMERICA BY 
      KENNETH H. THOMAS, BW