Hearing on Financial Services Modernization

Prepared Testimony of Mr. John Taylor
President and CEO
National Community Reinvestment Coalition

4:00 p.m., Thursday, February 25, 1999

The remarks expressed here represent the views of 690 community reinvestment organizations that comprise the membership of NCRC.


Good afternoon Chairman Gramm, Senator Sarbanes and distinguished members of the Senate Banking Committee. My name is John Taylor, and I am the President and CEO of the National Community Reinvestment Coalition (NCRC). NCRC is the nation's CRA trade association composed of more than 690 community reinvestment organizations from inner city neighborhoods and rural areas. NCRC has represented the community's perspective on the Consumer Advisory Council of the Federal Reserve Board, Fannie Mae's Housing Impact Advisory Council, Freddie Mac's Affordable Housing Council and before Congress.

NCRC thanks you for the opportunity to testify before you today on a subject, financial modernization, that has profound impacts on access to capital and credit for this nation's underserved communities. Over the years, community development corporations (CDCs) and other NCRC members have been engaged in countless economic development projects that successfully turn around sections of neighborhoods. But NCRC's members struggle against larger forces of disinvestment and deterioration. What they understand is that hundreds of homes and small businesses need loans in order for entire neighborhoods to be revitalized. Without sustained access to capital and credit, neighborhoods die.

NCRC believes that CRA needs to be expanded to all non-bank financial companies allowed to affiliate with banks under a modernization bill. If we do not expand community reinvestment obligations and data disclosure requirements, I am afraid that CDCs and other NCRC members will face an uphill battle against decline like I did when I was a CDC director in Somerville, Massachusetts. This would be most disheartening after several years of dramatic gains in lending and investing for working class and minority neighborhoods.

In particular, NCRC urges you to extend community reinvestment requirements to non-depository institutions, like insurance agents or mortgage companies, that make loans and are affiliated with bank holding companies. We also need to expand data disclosure requirements to insurance companies and improve upon small business data disclosure as detailed later in my testimony.

The current versions of financial modernization would slow down the progress in community reinvestment because they do not allow CRA to evolve with the rapid changes in the financial industry. Insurance and securities affiliates of banks are increasingly conducting lending and selling bank-like products, yet are not covered by community reinvestment requirements. As assets and banking products are shifted out of banks and into holding company affiliates exempt from CRA, the reach of CRA is reduced to a smaller and smaller portion of the nation's lending activities. CRA will not be able to leverage as many loans or investments for traditionally underserved communities if CRA is not modernized as the financial industry is modernized by Congress.

CRA has been the most effective tool to promote the American Dream that has ever been developed. It is not a public sector program nor a burdensome regulatory requirement.(1)

It simply says that depository institutions are required to serve, in a safe and sound manner, all the communities in which they are chartered. By combating discrimination and promoting banker-community partnerships, CRA extends the American Dream of homeownership, small business ownership, and wealth-building to millions of Americans. NCRC agrees with President Clinton when he said the other week at the U.S. Conference of Mayors that CRA should be above politics. Indeed, NCRC believes that CRA should enjoy wide bi-partisan consensus as an important element of welfare reform and the nation's strategy of providing jobs and promoting economic development in inner cities and rural areas.

The Benefits and Success of CRA

CRA improves our capitalistic system by opening up new markets for banks and by spurring the creation of entrepreneurs in our nation's distressed neighborhoods. It benefits our economy because bankers and underserved communities are asked to establish relationships and overcome barriers to lending which existed simply because of incomplete information flows. Economists and political leaders should embrace CRA as the market-based solution to our nation's economic and social problems.

Because CRA removes market imperfections and barriers, working class and minority Americans have experienced a dramatic increase in access to credit in the 1990's. In 1990, low- and moderate-income borrowers received 18 percent of all home mortgage loans made by banks. By 1997, the percentage had shot up to 28 percent. Blacks and Hispanics received 14 percent of all purchase loans in 1998 - up significantly from 10 percent of 1990. This lending surge is directly attributable to the federal banking agencies' improved enforcement of CRA and to the universal recognition that access to private capital is the key to neighborhood revitalization. Testifying before the House Banking Committee a few days ago, Federal Reserve Board Chairman Alan Greenspan stated that "quite profound" increases in credit available to underserved communities is due to CRA and readily apparent when looking at the data.

CRA agreements are also responsible for the boost in lending to traditionally underserved populations. Since the passage of CRA in 1977, lenders and community organizations have negotiated more than 360 CRA agreements totaling more than $1 trillion in loans and investments for traditionally underserved neighborhoods. More than 95 percent of the dollars have been committed by banks since NCRC's inception in 1992.

CRA agreements are democratic community reinvestment plans. Under the agreements, banks pledge to make specified dollars and numbers of loans and investments. Community groups help the banks succeed in achieving agreement goals by offering homeownership counseling, marketing bank products, and performing other services that help banks reach working class and minority neighborhoods.

For example, NCRC member the Pittsburgh Community Reinvestment Group worked with banks to identify low-income, single parent, female-headed households as an underserved market. Through community meetings and homeownership counseling sessions, lending to this population group has increased significantly. Even small lenders such as Fidelity Savings Bank and Community Savings Bank have closed a significant amount of loans to single parent females in the last few years.

Banks with CRA agreements are more effective in reaching minority and working class neighborhoods than those that have not made agreements. Using NCRC's database on CRA agreements, the New School for Social Research calculates that banks with CRA pledges performed the best in the minority and lower income markets. In other words, their market share of home loans to these borrowers and neighborhoods was higher than their overall market share. Banks without agreements, in contrast, had lower shares of the minority and low income market than their overall market share to all populations. These differences were statistically significant, and based on data in 1994, which was a year of high levels of lending to underserved communities.

CRA's genius is that it is a win-win for all sectors of society. Encouraged by CRA, banks have found profitable opportunities serving minority and lower income communities that they may have once overlooked. In fact, a Federal Reserve study conducted by Glenn Canner and Wayne Passmore finds that banks with higher volumes and percentages of loans in minority and lower income neighborhoods were slightly more profitable than banks with few loans to lower income communities. This study considered the years 1993, 1994, and 1995 - three years of large increases in lending to minority and lower income populations.

President Clinton was correct in noting recently that no bank has gone broke making CRA loans. The banking industry has enjoyed its most profitable years ever as CRA lending has reached record heights. Banks are starting to sell their loans on Wall Street because they want more capital with which to make more CRA loans. To date, almost $2 billion of CRA loans have been securitized by Wall Street.

Critics of CRA overlook the profitability of CRA lending and the improvements CRA makes to the functioning of the free market. Instead, they focus on so-called extortion during the merger application process. In exchange for not protesting or supporting a merger application on CRA grounds, it is alleged that community groups have received funding from banks. But community groups are bad extortionists, if the critics are correct in saying that groups are out on the make. NCRC's review of CRA agreements involving NCRC members in 1997 and 1998 shows that only 1 percent of the total dollar amounts were dedicated for grants that supported CDCs, charities, and financial intermediaries like LISC and Enterprise. In dollar terms, only $9.5 billion out of $912.4 billion were grants. In addition, NCRC calculates that under $160,000 of the almost $1 trillion went specifically to CRA advocacy groups. This is virtually 0 percent.(2)

While there may be a few instances of "greenmail," NCRC and its membership renounce this practice as counterproductive to the goal of leveraging capital and credit for underserved communities. NCRC's members understand that adversarial negotiations do not produce long lasting collaborations among banks and community groups that can identify and lend to creditworthy residents of working class and minority neighborhoods. These partnerships involve a high degree of cooperation and trust. Extortion is simply not a part of the partnerships. Instead, the very small number of grants in CRA agreements are devoted to credit counseling and other services that help banks lend and invest in traditionally underserved neighborhoods in a safe and sound manner.

Financial Modernization Should Not be Approved Unless CRA is Expanded

NCRC's 690 community-based organizations strongly believe that financial modernization legislation will erode the dramatic progress in community reinvestment if CRA is not expanded to cover any financial company allowed to affiliate with banks. NCRC is pleased that the current version of HR 10 being considered in the House would expand CRA coverage to include wholesale financial institutions, which would be a new type of investment bank that would not be federally-insured and would be allowed to accept deposits greater than $100,000. But the piecemeal expansion of CRA would allow mortgage companies, securities firms, insurance companies, and other financial institutions to escape CRA coverage although they could affiliate with banks. This would allow holding companies to shift assets away from CRA-covered banks and thrifts into CRA exempt affiliates and subsidiaries. Such asset shifting could significantly diminish the resources with which banks and thrifts make CRA loans and investments. Surely, lawmakers do not desire new institutional arrangements which stop the creation of jobs, wealth, and small businesses in minority and lower income communities being made possible by CRA.

Cross-ownership among banks, thrifts, and non-depository institutions is likely to accelerate the drainage of assets out of banks and thrifts. In 1977, banks held 60 percent of the assets in the financial industry. In 1997, banks controlled only 27 percent of the total assets in the financial industry. Mutual funds, pension funds, insurance products and other financial instruments controlled the other 73 percent of assets. It is likely that cross-ownership among financial institutions will only intensify this asset shifting, and thus reduce the coverage and effectiveness of CRA. In addition, CRA would not cover the checking, lending, and other bank-like activities of mutual funds and other non-depository institutions even though these entities would be able to affiliate in an unlimited manner with banks.

State Farm's new thrift illustrates the perils of financial modernization without a modernization of CRA. Even though a substantial number of State Farm's 16,000 insurance agents eventually will be originating loans across the country, the Office of Thrift Supervision (OTS) will only conduct CRA examinations in Bloomington, Illinois, where State Farm's corporate headquarters are located. The OTS claims it does not have statutory authority to expand CRA requirements to the insurance agents. State Farm does business with one in four Americans. By confining CRA to a tiny part of its service area, most of State Farm's lending activity will not be monitored by regulatory agencies for CRA compliance. If we want to increase access to credit and capital, financial modernization legislation must not codify the current restrictions on CRA assessment of lending activity.

Last year, several amendments were proposed in the House Banking Committee markup that would allow CRA to evolve with the structural changes in the financial industry. For example, Rep. Luis Gutierrez (D-IL) and Rep. Carolyn Kilpatrick (D-MI) proposed an amendment that would have prevented financial holding companies from engaging in newly authorized financial activities unless the appropriate federal regulatory agency determined that all of their depository subsidiaries and non-bank affiliates served the credit and consumer needs of minority and lower income communities. Another amendment was introduced that would have required insurance company affiliates of holding companies to offer policies in low- and moderate-income communities, and that would have required securities companies to demonstrate that their branch distribution network did not arbitrarily exclude low- and moderate-income communities. NCRC urges the House and Senate to reconsider and adopt these and other provisions expanding community reinvestment obligations.

The Chairman's draft financial modernization bill requires no sanctions for poor CRA performance. In last year's version of HR 10 and in the current version of HR 665, the Federal Reserve Board is granted the authority to require a holding company that had banks with failing CRA grades to divest or cease the operations of insurance and securities subsidiaries. The Chairman's bill not only removes possible penalties, it also removes the requirement that depository subsidiaries of financial holding companies have Satisfactory and Outstanding ratings. NCRC believes that the maintenance of Satisfactory and above ratings is a minimal requirement for engaging in new insurance and securities activities. More than 98 percent of banks and thrifts in the last few years have achieved Satisfactory and above ratings. The very few lenders with failing grades have failed to serve the convenience and needs of their communities. It is not fair to communities nor to lenders that have passing ratings to give failing banks a free pass for not abiding to the country's law on community reinvestment and fair lending.

Not only must CRA be expanded, its current enforcement mechanisms must not be weakened. Safe harbors for banks with Satisfactory and above ratings prevent community groups, regulatory agencies, and even lenders themselves from considering how CRA performance can be preserved when banks undergo complicated institutional changes during mergers. Even with an overall Satisfactory or Outstanding rating, bank performance can differ dramatically by state and other geographical areas. Community groups, citizens, mayors, and other public officials should not have to prove that the overall rating should be below Satisfactory in order to raise legitimate concerns about CRA performance in their communities during the merger application process.

Mr. Chairman, the proposed anti-extortion provision, moreover, threatens the American tradition of free speech since federal regulatory agencies would have to decide which testimony is permissible and which is criminal. This provision is unnecessary because the federal banking agencies can distinguish testimony that raises legitimate points from frivolous testimony designed to curry favor with banks. The public comment process to federal agencies must be protected as a fundamental right which benefits everyone by promoting the exchange and development of information and knowledge.

Expand Data Disclosure Requirements

The Home Mortgage Data Disclosure Act (HMDA) has enabled regulatory agencies to conduct thorough CRA exams of the home lending activities of banks and thrifts. In addition, community organizations and local public agencies have been able to leverage home loans for traditionally underserved communities by holding banks accountable for their performance and helping them identify missed market opportunities.

A HMDA-like disclosure requirement can likewise encourage insurance companies to identify missed market opportunities. In a few states that have data disclosure requirements, NCRC members like the Massachusetts Affordable Homeownership Alliance (MAHA) have conducted data analysis to identify the market leaders and laggards in minority and working class neighborhoods in the Boston area. Their analysis reveals that loss ratios (premiums divided by claims) are lower in the most underserved zip codes than throughout the rest of the state. This indicates that more profitable business can be done in the underserved zip codes. MAHA has formed partnerships with insurance companies to offer homeownership counseling and engage in other activities designed to increase business in minority and working class neighborhoods.

Robert Klein, the chief economist of the National Association of Insurance Commissioners, conducted a comprehensive study collecting data on 25 metropolitan areas from 1989 through 1992. He finds that after controlling for risk of loss, a ten percentage point increase in the number of minorities in a zip code is associated with a two percentage point increase in the number of Fair plans, which are government-sponsored insurance plans of last resort for those who cannot find insurance in the private market. According to Klein, "The NAIC believes some degree of continued public monitoring is necessary to ensure that voluntary efforts are successful and sustained. This will help to motivate insurers who would otherwise engage in discrimination or fail to pursue legitimate economic opportunities to serve the inner city."

The data disclosure requirements for small business lending also need to be improved. In a new study published by the National Bureau of Economic Research, economists David Blanchflower, Phillip Levine, and David Zimmerman document discrimination in lending to Black-owned small businesses. Using survey data for 1993 and 1994 of more than 4,600 businesses, the authors find that Black-owned firms experience denial rates that are 25 percentage points higher than white rejection rates, after controlling for credit-worthiness and a wide array of other characteristics of the business and the owner.(3)

The studies on the availability of insurance and small business loans to underserved neighborhoods were conducted using limited data sets or one-time surveys. The results make it clear that annual data reporting is imperative, and that the data on insurance activities and small business lending must include detailed characteristics on the race, income levels, sales volume, and census tract locations of the customers and small business borrowers (Currently, the new CRA small business data lacks information on the characteristics of the businesses and their owners). Detailed data disclosure makes it possible to find out who are market leaders in serving neglected customers and businesses. Then, public persuasion and sanctions, when necessary, should be used to eliminate discriminatory practices and encourage financial institutions serving few working class or minority communities to emulate the practices of their competitors who do much business in these neighborhoods.

Safety and Soundness Issues Need to be Addressed

Expansion of CRA to the new financial conglomerates, however, is not enough to allay NCRC's concerns about financial modernization legislation. NCRC believes that policymakers have not addressed the safety and soundness issues associated with unlimited cross-industry ownership. The recent experience after the California earthquake illustrates the serious risks associated with financial behemoths. After the earthquake, the Fire and Casualty subsidiary of State Farm processed claims almost equal to the assets of the subsidiary. What would happen in future emergencies when banking is mixed with insurance underwriting? Would the holding company draw down the resources of federally-insured depository subsidiaries to bail out the insurance affiliates? Would this leave the depository institutions in precarious financial condition?

Prudent limitations on non-banking activities are maintained in order to preserve safety and soundness. The current versions of modernization legislation veer too far towards lifting limits. For example, they would allow Section 20 subsidiaries to earn all of their revenue from securities operations. What seems more important than the affiliate versus subsidiary issue is the limitations on cross-industry ownership. Caps on the amount of non-banking activities conducted by subsidiaries and affiliates are designed to prevent financial difficulties by limiting the losses associated with riskier activities. But if these limitations are lifted, federally-insured institutions become dangerously exposed to sudden crises that can wipe out assets in one fell-swoop. Federal Reserve Chairman Alan Greenspan in his testimony last summer in front of the Senate Banking Committee stated that "losses in, for example, securities dealing or fire and casualty insurance underwriting conducted in an operating subsidiary could occur so rapidly that they could overwhelm the bank parent before actions could be taken by the regulator." Likewise, NCRC believes that in times of crisis, holding companies would not refrain from raiding federally insured affiliates although affiliates are supposed to have stronger firewalls.

Japan, which has a more deregulated banking system than the United Sates, is confronted with $600 billion worth of bad loans. Relative to the size of its economy, Japan's crisis is six times as bad as our S&L crisis was, according to a Washington Post article. NCRC suggests a sober and incremental approach towards deregulating the financial industry. The bold deregulation proposed by financial modernization legislation threatens to create an ailing industry that is unable to meet community reinvestment needs of neighborhoods across the country.

NCRC calls on Congress to ask the General Accounting Office (GAO) to thoroughly examine the safety and soundness issues and to make recommendations regarding prudential limits on cross-industry ownership. What has been the safety track record of Section 20 subsidiaries since the Federal Reserve Board increased the cap to 25 from 10 percent in December of 1996? What caps would work for insurance affiliates and subsidiaries? What is the experience abroad with fewer limitations and safeguards?

Impacts of Consolidation and Mergers on CRA Performance and Enforcement

Extending CRA and adding safety and soundness safeguards will not be enough. Financial modernization legislation will intensify the rate of consolidation in the financial industry by authorizing additional combinations of banking, insurance, and securities operations. In this environment, CRA enforcement must be toughened. Mergers will lead to declines in CRA-related investments and loans if regulatory enforcement is lax and citizens do not have opportunities to make their views known during the merger application process. Financial modernization legislation must require a merger application process and a public comment period for all types of proposed mergers and combinations. Currently, the various bills would allow most bank holding companies to merge with non-depository institutions such as mortgage companies and insurance firms without submitting an application to federal banking agencies.

A number of studies suggest that mergers and acquisitions decrease CRA performance, particularly in the small business lending area. Of the eleven largest mergers in New England during 1993 and 1994 examined by Joe Peek and Eric Rosengren of the Federal Reserve Bank of Boston, eight of the post-merger institutions decreased their small business lending. Similarly, Federal Reserve economist William Keeton found that bank consolidation decreased small business lending in the Midwest and Mountain states. Keeton's study showed that the greatest difference in small business lending was among independent banks that had a small business loan (defined as a loan less than $100,000) to deposit ratio of 6.6% and out-of-state multi-bank holding companies with a ratio of 4.7%. In other words, the interstate merger trend is creating precisely the type of bank least likely to lend to small businesses. Finally, in a recent Staff Report published by the Federal Reserve Bank of New York (December 1998), Berger, et. al. conclude from an extensive literature review that "consolidations of large banking organizations tend to reduce small business lending..."

Small business lending declines after a merger because it is a type of lending that depends on intimate knowledge of community residents and businesses that only loan officers in local branches possess. After mergers and acquisitions, decision-making is often centralized in headquarter offices located hundreds of miles away from what used to be the local branch office. Local CRA-related lending and investing can be protected only by a thorough merger application process that allows regulatory agencies, community groups, and lenders to figure out how CRA performance can be strengthened after dramatic institutional changes following mergers. During the merger application process, community groups and lenders will sign CRA agreements specifying multi-year commitments to offer housing, small business, and community development loans and investments.

Community group input regarding the First Union-Corestates merger is an example of how CRA gains can be preserved by a participatory merger application process. First Union, a regional bank that competes vigorously with Nationsbank, had just taken over Corestates, the last regional bank headquartered in Philadelphia. This merger posed significant dangers to the economy of Pennsylvania, as it involved the potential closure of hundreds of branches and the loss of thousands of bank jobs.

After negotiations between community organizations and First Union, the bank agreed to offer $250 million annually in home loans in Pennsylvania to low- and moderate-income borrowers. This was a slightly higher level than First Union and Corestates was offering before the merger. In addition, the bank agreed to offer a free checking account and to adopt a "no-fee" ATM policy.

The First Union CRA agreement was the result of a needlessly difficult process. The Federal Reserve Board, which was the lead federal regulator on this merger, grudgingly held public hearings on the merger and extended the public comment period, but only after a public outcry from more than 100 community groups and after the intervention of Pennsylvania's two U.S. Senators and a bi-partisan group of elected officials. In addition, the Attorney General of Pennsylvania will enforce the terms of First Union's agreement, especially the "no fee checking" and ATM provisions for low-income recipients of Social Security and other federal benefits.

Why did it require the intervention of U.S. Senators and state and local officials to ask the Federal Reserve Board and the bank to seriously consider the merger's ramifications to traditionally underserved communities? This process of preserving community reinvestment should be an automatic component of the merger application procedure; it should not be an excruciating exercise that depends on the good will of elected officials.

NCRC believes that the merger application process must include public hearings and the submission of community reinvestment plans by the merging banks. Since it is clear that bank modernization legislation will intensify the pace of consolidation in the financial industry, public policy must counter the strong forces accompanying consolidation that hasten disinvestment from our nation's underserved communities.

Combinations of Financial and Non-Financial Companies

In many areas, bank modernization's winners and losers will depend on the regulatory framework that accompanies modernization. In one aspect though, it is clear what the impact of bank modernization is. Proposals to allow combinations of financial and non-financial companies are harmful to everyone - communities and corporations alike.

Safety and soundness in the financial industry will deteriorate significantly if financial holding companies are allowed to affiliate at all with non-financial corporations. We should learn from the mistakes of foreign countries who have had particularly disastrous experiences allowing combinations of financial and non-financial companies. In Finland, combinations of commerce and banking resulted in losses that in proportion exceeded our savings and loan crisis. One of the world's biggest bank failures totaling $14 billion involved the Credit Lyonnais in France which was a banking and commerce conglomerate.

A contributing factor to failures would be the mixing of banking and commerce because banks would no longer impartially allocate credit. They would be motivated to extend credit to their non-financial affiliate even if other businesses may be more creditworthy. If a non-financial affiliate of a bank is mismanaged, the bank has an incentive to continue financing it in hopes that its condition improves. More credit, however, simply feeds the mismanagement rather than rectifying it. Thus, huge bank and non-bank conglomerates fail because the non-financial affiliate is never subjected to the discipline of receiving less credit or no credit until its managerial practices improve. Overall economic efficiency declines in countries with bank and non-financial conglomerates.

The entry of banks into non-financial activities will impede the growth of the small business sector. Banks would favor their commerce affiliates over independent small businesses in their lending and investing decisions. Small businesses in lower income and minority neighborhoods will be particularly disadvantaged since they have the greatest need for loans. Allowing banks to aggressively enter the non-banking industry thwarts the CRA's emphasis of small business development in inner city neighborhoods and underserved rural areas.

NCRC asks the Chairman to reconsider his proposal to allow bank holding companies to own commercial firms.

Public Obligations of Financial Institutions

Some laissez-faire proponents of financial modernization ask why should financial institutions be subjected to community reinvestment obligations. Financial institutions have an obligation to serve all segments of the population because governments nurture their growth and protect their assets. Federal and state governments use their authority as representatives of the citizenry to grant financial institutions charters. In other words, financial institutions have an obligation to serve all members of the public because the citizenry allowed them to exist. Section 802 of the Community Reinvestment Act creates a legal obligation on the part of depository institutions "to serve the convenience and needs of the communities in which they are chartered." Chartered is the key word; all other non-bank financial institutions also receive their right to exist through a publicly granted charter. Therefore, they should have a legal obligation to serve the financial needs of the communities in which they are chartered.

The public, through their government agencies, protects the safety and soundness of chartered financial institutions. Policymakers first applied CRA to depository institutions because federal deposit insurance is ultimately backed by the taxpayers. Yet, Mark Pinsky's and Valerie Threlfall's article for the National Association of Community Development Loan Funds points out that most non-bank financial institutions also receive substantial government protections. For example, according to Pinsky and Threlfall, the Securities Investor Protection Corporation has the authority to borrow up to $1 billion dollars from the U.S. Treasury in order to reimburse investors of insolvent brokerage firms. Likewise, the insurance fund for pension plans has a line of credit from the U.S. Treasury that can be used in emergencies.

Consumer Disclosure and Protection

In order to protect consumers, new regulatory and legislative initiatives will have to accompany bank modernization legislation. Financial holding companies will be able to offer a dizzying array of bank, security, and insurance products while worrisome evidence abounds that the banking industry is not properly disclosing the risk associated with nondeposit investment products. An FDIC-sponsored survey, which is regarded as the most comprehensive monitoring study to date, found that in the almost 4,000 telephone calls by "mystery" customers, representatives of lending institutions did not properly disclose information to customers an incredible 55 percent of the time.

NCRC is pleased that the various financial modernization bills contain provisions protecting state disclosure laws and requiring the Federal banking agencies to develop disclosure laws as well. NCRC, however, supports the position of Consumers' Union and Ralph Nader that an amendment to the bills is needed that establishes a federal law and regulations protecting the privacy of consumer data. The federal law would empower consumers to decide if they want financial institutions to share their data with their affiliates or outside companies. The financial institution would be required to obtain verbal and written permission for data sharing. This provision would protect minority and working class consumers from unscrupulous use of information about their financial and credit status. For example, if a consumer applied for a loan, a bank should not be allowed to share the applicant information with a subprime affiliate unless authorized by the consumer. Unauthorized data sharing promotes steering of minorities and lower income customers into high priced, subprime loans when these consumers actually wanted their application considered by the traditional bank, not the subprime affiliate.

Reinvestment Provisions for a Modernization Bill

In order to preserve and build upon the community reinvestment gains of the last few years, NCRC recommends the following:

Expansion of CRA and Consumer Service Obligations

  1. CRA must be extended to all affiliates of bank holding companies.

  2. CRA must be extended to all operating subsidiaries of federally-insured financial institutions.

  3. Bill must extend a CRA-like law to mortgage companies, finance companies, and credit unions regardless of their affiliation with banks.

  4. Bill must extend CRA coverage to the newly allowed Wholesale Financial Institutions (WFIs). WFI's would not be federally-insured and only accept deposits of over $100,000.

  5. Bill should extend a CRA-like law to securities firms, investment companies, investment advisors, mutual funds, or else develop a new National Reinvestment Fund that these industries are asked to fund.

  6. Bill must require "lifeline banking accounts" for all depository institutions.

    Data Disclosure

  7. Bill must extend CRA-like and Home Mortgage Disclosure Act (HMDA)-like provisions to insurance companies and to insurance activities that will be newly allowed in bank holding companies.

  8. Bill must improve upon the small business data reporting recently required under CRA. Specifically, lenders must be required to report on the race and gender of the business owner and the sales volume (expressed in dollars) of the business. In addition, lenders should be required to report the specific census tracts in which the loans were made in addition to the current requirement of reporting the income levels of the census tracts. In addition, denials must be reported as well as approvals.

    Regulatory and Structural Issues

  9. Bill must require an application process for mergers between depository institutions and non-banking financial entities, with regulatory approval based at least partially on the CRA records of the institutions.

  10. Bill must prohibit mixing commerce and banking so as to preserve the safety and soundness of the banking industry and to ensure that minority and low- and moderate-income communities are served.

  11. Bill must maintain thrift charters and clarify that all activities undertaken by thrifts are covered by CRA.

  12. Bill should establish an advisory council on community revitalization that would examine the impact of the financial modernization bill on community reinvestment and issue annual recommendations to Congress for increasing access to credit and capital for traditionally underserved populations. An annual report on financial modernization's impact on CRA enforcement and community reinvestment would be submitted to Congress.


1. The American Banker reported in early 1996 that small banks felt that the new CRA exams were not burdensome.

2. The Citcorp-Travelers voluntary pledge involved largest dollar amount of loans and grants to nonprofits of $6 billion or 5.2% of their $115 billion commitment. Available materials on the pledge do not separate loans from grants, so the $6 billion represents an over-estimate of the amount of grant funding. Also, the pledge was made voluntarily when the companies announced their application to the Federal Reserve Board, and did not involve signing a contract or sending a signed letter to community groups.

3. An earlier study, Survey of Small Business Lending in Denver, conducted by Frank Ford of the University of Colorado also found racial disparities in small business lending to firms with similar characteristics.

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