Opinion
Keep the `c' in CRA
Minneapolis / St. Paul Business Journal - by Kevin Maler
Between 1993 and 1995, the volume of home mortgages loans in the Twin Cities metro area fell 15 percent, according to data prepared by U.S. Treasury Department's Office of the Comptroller of the Currency (OCC). But over the same time period, the volume of home loans to minorities rocketed up nearly 30 percent.
It's a story repeated across the country: At a time when home mortgage loan volume in the U.S. is rising only modestly for all groups, lending to minority groups is accelerating. According to the OCC report released last month, the volume of loans to minority groups increased 33 percent over the two-year period while all loans increased only 10 percent.
The bustle of activity has not missed people in financially strapped neighborhoods, either. The OCC separated out low- and moderate-income census tracks, too, and found that the same trend applies. Nationally, the volume of loans to these areas increased 22 percent. In the Twin Cities the increase was less convincing -- up 4.5 percent -- but still strong given the overall market performance.
The news, to say the least, is heartening. Home ownership is a key element to stabilizing troubled neighborhoods. Giving the people who live there a greater stake can only serve to slow the deterioration that many of these areas have suffered. It may even reverse it. And homeowners are consumers. That means retailers can return to undeserved urban areas with the expectation that people will be there to buy their goods.
Any number of factors are responsible for this important reversal. Low interest rates have made home ownership more affordable. The slowdown in overall mortgage lending activity also plays a role, one suspects; mortgage bankers are forced to be more aggressive and have found some pent-up demand in minority communities.
But a last factor can't be overlooked: the Community Reinvestment Act, or CRA. The federal law requires banks to make loans in minority communities; federal regulators assess banks' performances and assign each a rating. Community groups can make use of these ratings when banks file a petition to make an acquisition by pointing to them in the comment period. Community activists don't typically stop an acquisition by focusing on an institution's CRA record, but they can certainly wrangle a stronger commitment.
Community groups play an important role in making sure CRA works. So why are regulators changing this balance, in effect, watering down the law?
The Federal Reserve has instituted rules that would allow larger bank holding companies that are well-capitalized and have satisfactory CRA ratings to complete some acquisitions -- particularly of "nonbank" groups like mortgage companies and investment firms -- without going through the usual review process. Indeed, banks in some cases could complete deals without any regulatory approval.
The rule change, eagerly sought by large bank holding companies, was implemented in the name of easing the paperwork and bureaucracy. Certainly compliance with CRA is burdensome, as any banker can tell you, but this rule change isn't the solution. For one thing, the changes speed up an acquisition at best by a few weeks, and more likely by only a dozen days.
Furthermore, the rule favors large banks. Compliance with CRA already falls disproportionately on smaller community banks; with a smaller asset base and fewer branches, they can't benefit from centralizing the compliance functions the way a large bank can. Nor are community banks likely to be racing to hammer out an interstate deal to buy an investment firm.
The Fed is right to look for ways that lessen the burden of CRA for all banks. But it shouldn't do it by taking an important player out of the process -- the communities which are served by the institutions.
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