Hearing on Financial Services Modernization

Prepared Testimony of Mr. F. Barton Harvey
Chairman and CEO
The Enterprise Foundation

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

Good afternoon, I am Bart Harvey, Chairman and CEO of The Enterprise Foundation. Thank you for the opportunity to testify about the importance and impact of the Community Reinvestment Act (CRA). As you well know, banks are required by CRA to "help meet the credit needs of the entire community." CRA does not require banks to make loans in particular places or to subsidize unprofitable borrowers, but it does require a bank to consider its entire community when making lending decisions. Under CRA, banks receive ratings from the various bank regulatory agencies on how well they serve low- and moderate-income borrowers and neighborhoods. These ratings are public information.

The Enterprise Foundation

The Enterprise Foundation is dedicated to rebuilding neighborhoods and providing opportunities for people to take control of their lives and their communities. It was launched in 1982 by Jim and Patty Rouse and is headquartered in Columbia, Maryland, so we are constituents of Senator Sarbanes. Through our local offices located across the country we are involved on the ground in seven states represented by a members of this committee. Enterprise works with a vast network of more than 1,100 nonprofit organizations and in more than 400 locations to improve America's urban neighborhoods through housing, job creation and training, safety and a variety of support services. Enterprise has raised and committed $2.7 billion in loans, grants, and equity to build or renovate 96,000 apartments and houses. Those funds leveraged an additional $2 billion in public and private financing. Providing homes for hundreds of thousands of people makes Enterprise the nation's community development leader. CRA has been absolutely vital to the development of the partnerships with the banking industry that have been so helpful to our work in low-income neighborhoods.

Before I begin my testimony today, I would like to submit for the record a publication produced by The Enterprise Foundation entitled Community Reinvestment: Good Works, Good Business. It describes the Community Reinvestment Act and highlights examples from across the country of banks working in low-income communities to bring access to much needed capital - the life blood of community revitalization.

Background on CRA

It is worth noting that CRA was enacted in 1977 in response to widespread complaints about banks "redlining" ­drawing on a map with a red pen and arbitrarily denying credit to certain neighborhoods within those redlined boundaries. Twelve years later, in 1989, CRA ratings were publicly disclosed for the first time after studies revealed disparities between bank loan approval rates for white and black borrowers with similar incomes and credit histories. Both the original law and its subsequent toughening were inspired by some real abuses by the banking industry.

In recent years, CRA has had its regulations simultaneously streamlined and toughened in response to complaints from the banks that there was too much paperwork and the community groups that the regulations were too lax. The Clinton Administration has both eliminated paperwork requirements and made the actual analysis of banks' lending and investments more meaningful. This process is still not enormously rigorous. About 97% of the banking industry receives a "satisfactory" or "outstanding" rating. Nevertheless, CRA has made banks consider business opportunities in underserved areas and has resulted in large increases in bank investments in poor communities.

Examples of Enterprise's work with banks

I'd like to start with three examples of how CRA is helping The Enterprise Foundation accomplish its goal of helping Americans up and out of poverty, and at the same time is profitable for the banks involved.

My first example is from New York City, not a place that one ordinarily associates with homeownership. Thanks to a unique partnership program called CityHome between The Enterprise Foundation, the City of New York and a group of New York banks including Chase Manhattan, Citibank, Dime Savings Bank, Republic National Bank of New York, and Fleet Bank, lower income New Yorkers are buying formerly abandoned brownstones all over the city. I have attached an article from the New York Times that describes the CityHome program in greater detail.

This is how it works: the city turns boarded up houses over to the local office of The Enterprise Foundation, which contracts with small nonprofit and for-profit builders to renovate the properties and local nonprofits to find potential buyers. The banks provide affordable mortgages on the properties. The homebuyer has the opportunity to own a renovated home, New York's neighborhoods benefit from the clean-up of blighted properties and the city, as a whole, gains stable, working class homeowners. All of this is made possible by the influence of the Community Reinvestment Act. The banks would otherwise have no incentive to participate.

Another example of good works and good business spurred by CRA is NationsBank's (now Bank of America's) investments in the Low Incoming Housing Tax Credit. Working with the Enterprise Social Investment Corporation (ESIC), NationsBank recently invested $300 million to build 10,000 houses and apartments across the country. The fund, Nations Housing Fund III, is used to invest in affordable multifamily housing properties which qualify for the Low Income Housing Tax Credit. Communities that typically have the most difficulty in raising equity, such as inner-city properties and those serving people with special needs are targeted. For example, in a Baltimore neighborhood that had not seen any new residential development in over 20 years, 47 new apartments for senior citizens were constructed. The ongoing partnership between NationsBank and ESIC, one that would not exist without CRA, has resulted in the commitment of $500 million for the creation of more than 16,000 new homes.

The third example of how CRA helps Enterprise bring low-income people into the economic mainstream is our lending program. The Foundation lends to nonprofit community groups to fund their housing development activities. Our loans are used to finance a wide array of crucial activities in the development process. For example, Enterprise lending may fund the cost of acquiring property, finance construction activity, or provide operating capital for projects in the development stage.

In many cases, the money that Enterprise provides makes the difference between a project's success or failure. Since our loans average $250,000 for a duration of 12 to 24 months, the amount, term, and risk associated with our portfolio is beyond the tolerance of most lending institutions. However, because we guarantee and underwrite the individual loans to nonprofits, because we have a proven track record for financial responsibility, and because banks get CRA credit for their loans to us, twelve banks and others participate in our loan pool.

In 1998 Enterprise made 97 loan commitments totaling almost $25 million. Overall, we have $40 million in outstanding loans. In order to support our lending we maintain a $106 million dollar pool. Our lending acts as a catalyst attracting additional resources to the table to ensure a project's long-term viability.

Aggregate Impact of CRA

I have just given you three examples of how CRA has had an positive impact on the work of The Enterprise Foundation. What is the total impact of CRA? My colleague from NCRC cites over one trillion dollars in CRA commitments from banks since the passage of the law. Another way to look at this is to examine the CRA data that the banks submit to their regulators.

Ed Gramlich, a member of the Board of Governors of the Federal Reserve System noted in a recent speech "Some evidence shows that CRA appears to be a highly effective government program dealing with the credit needs of low and moderate income groups. For small business loans, in 1997 the 1900 large banks and savings and loan associations subject to detailed CRA reporting requirements made $159 billion worth of small business loans, two thirds of the national total for such loans. A significant share of these loans went to low and moderate income areas and groups. There were another $11 billion for small farm loans, one fifth of the national total for these loans, and another $18 billion for community development loans. While many of these loans would presumably have been made without CRA, the size of the gross loan numbers and their distribution across geographical areas suggest the importance of CRA in the process." It should be noted that the numbers cited to Governor Gramlich do not include home mortgage loans, which constitute a great deal of banks' CRA business.

Profitability of CRA lending

Not only is CRA lending widespread, but it is profitable for banks. The Enterprise Foundation collaborates with a wide variety of banks on investments in community development projects in low-income neighborhoods across the country. I would like to emphasize again that all of our work with banks has been profitable No one wants to see the banking industry lose money. CRA is an example of government regulation creating a win/win situation for banks and communities without costing any taxpayer dollars. CRA has shown banks good business opportunities that they otherwise would have missed. In addition, CRA helps ensure that the general public receives some benefit from the government protections (such as deposit insurance) that assist banks and preserve stability in the financial system. Doesn't this seem like "reinvented government" at its best?

In fact, as former Comptroller of the Currency Eugene A. Ludwig highlighted in 1997, ". . . the greatest era of CRA activity in history, the last three years, has also seen the highest levels of bank profitability in history." Since then, CRA commitments have continued to grow, as have bank profits. The first two quarters of 1998 finished an 18-month run of record earnings for banks. The third quarter, while profits were somewhat down at $15 billion, still had banks celebrating their second best quarter for domestic earnings on record, and the highest level of equity capital since 1941.

Comments on the Senate Committee Print

Anti-extortion language

I have just given you my overview of how CRA works now out in the real world. I would like to make some specific comments on your draft banking bill and how it might impact CRA. I would preface my remarks by stating that I am the C.E.O. of a national foundation that promotes community development. I am not a banking lawyer or expert on financial modernization, but I believe that you need to be very careful to draft a banking bill that does not harm CRA.

As I understand it, the basis of the opposition to CRA is that it allows community groups to "extort" contributions from the banks as a condition of regulatory approval of bank mergers. It is certainly a stretch to imagine the U.S. banking industry, which earned a record $47.1 billion in the first nine months of 1998, as the victim of all-powerful neighborhood groups. If you look at the fact that while FDIC-insured commercial banks have over $5 trillion in assets, the two largest community development intermediaries, The Enterprise Foundation and LISC, have less than $600 million in total assets, the threat posed to banks by community groups seems even more exaggerated.

With that as general context, I do understand some of the motivation behind the "anti-extortion" provision that Chairman Gramm has included on the list of possible additions to the Committee Print. While I don't think that there is any evidence of widespread abuse of CRA by community groups, none of us who work with banks on community development projects think that CRA should be a club that is used to bludgeon the banks until they give groups contributions. That is an abuse and that is wrong. CRA is about meeting the credit needs of low and moderate income communities. It is about bankable loans.

The language that I have seen that Chairman Gramm is considering including in your Committee Print seems overly broad and vague. Again, I agree with the intent, but think that you need to redraft it. There is no definition of intent nor does the bill define a time period that applies to the prohibited conduct. In addition, the language appears to prohibit more than cash contributions. It invites unintended consequences to put a broadly drafted and unclear prohibition in federal law without compelling evidence that it is needed.

Safe Harbor

I have similar reservations about Chairman Gramm's Section 303 which appears to prevent public comment on the CRA performance of institutions with a satisfactory or better CRA rating. There is no evidence that community groups abuse the comment mechanism under the current CRA regulations.

According to the Federal Reserve Board, one of the agencies that administers CRA, during the period 1993-1997 there were on average 1,100 bank merger applications subject to CRA each year. Of these, community groups raised substantive CRA objections to less than 70 applications, and on average less than 10 each year were either denied or withdrawn for CRA reasons. The image depicted of large numbers of banks being "held up" to have their merger applications approved is simply not supported by the facts.

There could be situations when a community group would need to comment on a financial institution's CRA rating between examinations because it was a large institution and the regulators had not examined some of the markets that the institution worked in. The regulators are free to disregard comments that they don't feel are valid so it seems that there is no need to shut down the free flow of information between the public and the regulators.

Preconditions language

I would also encourage the committee to include the provision that was in the House's financial modernization bill that required financial institutions that wish to engage in new activities to be well-managed, well-capitalized and to have a satisfactory CRA rating. The Senate committee print merely required them to be well-managed and well-capitalized. The House standard is hardly draconian. Ninety-seven percent of banks and thrifts for the past two years were rated satisfactory or outstanding.

The Senate draft invites the absurd possibility that an institution with a "needs to improve" or "substantial noncompliance" rating on CRA performance could expand into securities or insurance activities but could not buy another bank because its CRA performance was poor. If CRA is to remain at all relevant in the new financial services world, a satisfactory CRA rating should be a precondition for expanded powers.


It is interesting to note the arguments CRA opponents are not making. No one has suggested that U.S. banks have lost money because of lending in poor neighborhoods. Banks have lost money on lending overseas, commercial real estate ventures, derivatives trading, and a host of other speculative activities. For example, in the third quarter of 1998 alone, banks lost more than $445 million on derivatives. There is no evidence that "helping to meet the credit needs of the entire community" (the exact words of the CRA statute) has ever caused a bank to fail.

The practical results of CRA are impressive, indeed. An entire generation of community investment professionals has emerged who are driving banks' business into underserved areas in a profitable way. Their impact has both an economic and social return.

Partnerships between banks, neighborhood groups and local governments are rebuilding communities, block by block. The Enterprise Foundation has worked with the nation's largest banks on a host of multifamily, single family and special needs financing in inner city areas nationally, as well as with the country's smallest banks in a particular location. While CRA opens the dialogue, the special abilities found locally or in the community reinvestment offices make creative programs possible.

In conclusion, I would like to quote former Comptoller of the Currency Gene Ludwig on CRA's impact and effectiveness. "Now I have no illusions that CRA can bridge the huge opportunity gap for low and moderate income Americans. CRA alone cannot solve a myriad of problems ­ poor schools, crime, health care that afflict low and moderate income Americans. CRA is about doing profitable business, making good loans, and providing services for those low and moderate income Americans who are able to pay for them. This is not to deprecate the genuine genius of CRA; for unlike a handout, CRA brings people into the mainstream of America's great free market, not as second class citizens, but as fully responsible participants in their society."

Thank you for your attention.

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