The National Committee Reinvestment Coalition (NCRC) opposes the Financial Services Act of 1998 (HR 10) in its current form. Financial modernization legislation must expand the Community Reinvestment Act (CRA) to any financial company that affiliates with depository institutions. If community reinvestment obligations are not extended to non-depository affiliates and subsidiaries, the financial resources devoted to CRA would plummet as assets are shifted from banks and thrifts into non-depository institutions. This could halt the dramatic progress in CRA lending and investing. Since 1977, CRA has leveraged over $410 billion in reinvestment dollars for minority and lower income communities -- most of the reinvestment has occurred within the last five years.
A key time for CRA enforcement is the merger application process when lenders often make reinvestment commitments so that they can demonstrate to regulators and community organizations that they intend to strengthen their CRA performance. However, under HR 10 mergers between banks and non-depository institutions would not require an application nor be subject to a public comment period. The streamlining of the application process is another problematic aspect of HR 10 that could slow down the dramatic progress in community reinvestment of the last few years.
NCRC also believes that HR 10 threatens the safety and soundness of the financial industry. Prudent limits on the combinations among banking, insurance, and commerce should be maintained so that holding company exposure to riskier activities of non-depository institutions is minimized. The Federal Reserve Board, for example, caps the amount of revenues that can be generated from securities operations of a Section 20 subsidiary at 25 percent. HR 10 would remove this cap altogether, and would not cap the amount of revenue that could be generated from insurance underwriting. NCRC calls on the Senate to commission a General Accounting Office study assessing safety and soundness issues and making recommendations concerning prudential limits on mixing.
NCRC opposes the mixing of banking and commerce because these types of combinations have been calamitous in other countries. In addition, mixing banking and commerce would reduce the amount of credit flowing to independent small businesses, especially those in disadvantaged neighborhoods, since holding companies would favor their commercial affiliates to outside businesses in credit decisions.
Former Comptroller of the Currency Eugene Ludwig extolled CRA as "democratizing access to credit." If financial modernization legislation extended community reinvestment obligations to non-depository institutions, access to wealth will be democratized. Presently, the median net worth of Black and Hispanic households is only one tenth of that of white households. Providing opportunities for wealth accumulation is the secret to this nation's prosperity and the unparalleled prosperity of the financial industry. What could be a better rationale for extending CRA?
NCRC is the nation's CRA trade association of more than 670 community reinvestment
organizations dedicated to revitalizing inner city and rural neighborhoods.
Good morning Chairman D'Amato, 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 670 community reinvestment organizations from inner city neighborhoods and rural areas. NCRC's philosophy promotes pro-active partnerships among banks and low-income and minority communities dedicated to increasing access to capital and credit. As a trade association of neighborhood organizations, 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. I request that my written testimony be included as part of the official record in the Congressional Record.
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. Access to banking products and services is fundamental. With access, our communities thrive and create wealth through expanded homeownership opportunities and small business creation. Without access to capital and credit, our neighborhoods die. The contrast is that simple and stark among communities with bank branches and those lacking them. And the contrast will become even more apparent because of federal budget cuts to housing and economic development programs. Private capital is the only true hope for revitalizing our urban and rural areas. That's why NCRC has strongly endorsed and promoted bipartisan initiatives such as Empowerment Zones that leverage private capital for comprehensive neighborhood development.
Legislative and regulatory changes can have even more profound impacts on access to capital and credit than subsidies for private sector investment. For example, since its passage in 1977, the Community Reinvestment Act (CRA) has leveraged over $410 billion in reinvestment dollars for home loans, small business development, and community facilities in minority and low-income neighborhoods across the country. In 1996, low- and moderate-income families received more than 558,000 conventional home purchase loans (these are private market loans without any government guarantees). Also during 1996, 485,000 small business loans were issued to entrepreneurs in low- and moderate-income census tracts. If lending continues at this pace, about 6 million lower income families will enjoy the American Dream of Homeownership, and almost 5 million small business loans will be issued to struggling neighborhoods over the next 10 years. CRA must evolve with the changes in the financial industry so that the tremendous progress in reaching the traditionally underserved continues.
If capitalism is to be accessible for all Americans, CRA should be protected and expanded during this era of public sector downsizing and corporate upsizing (and consolidating). Welfare reform means that hundreds of thousands of families will lose their benefits in a few years. How will they become self-sufficient if they do not have access to small business, student, or home loans? CRA has encouraged lenders to participate in experiments with Individual Development Accounts (IDAs) and other tools designed to lift people out of poverty. CRA has enabled communities to revitalize themselves while decreasing their dependence on government assistance.
CRA's genius is that it is a win-win for all sectors of society. CRA has urged banks to find profitable opportunities serving minority and lower income communities. Banks are starting to sell their loans on Wall Street because they want more capital with which to make more CRA loans. 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. CRA also removes market imperfections and barriers to information. It benefits our economy because bankers and poor 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.
Homeownership, small business ownership, wealth creation, pulling yourself up by your own bootstraps - these are the reasons CRA has received bipartisan support. This is why Representative Jim Leach (R-IA) has joined his Democratic colleagues in supporting the expansion of CRA to wholesale financial institutions. This is why Senator Arlen Spector (R-PA) raised community reinvestment and anti-trust issues during the recent First Union takeover of Corestates.
NCRC's 670 community-based organizations strongly believe that HR 10 (the Financial Services Act of 1998) 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 would expand CRA coverage to include wholesale financial institutions, which would be a new type of investment banks 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 credit unions, 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.
Over in the House, several amendments were proposed that would allow CRA to evolve with the structural changes in the financial industry that would be accelerated under HR 10. 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. Rep. Joseph Kennedy (D-MA) introduced an amendment 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. In addition, Rep. Kennedy offered an amendment that would have prevented an insurance company from affiliating with a financial holding company if a court found that it had violated the Fair Housing Act and if the insurance company then did not comply with any consent decrees. Finally, Rep. Maxine Waters succeeded in attaching a requirement to HR 10 that holding companies offer lifeline (low cost) checking accounts. The Gutierrez and Kennedy amendments were not allowed to be considered on the House floor while the Waters' amendment was diluted in final House passage of the bill.(1)
In sum, the House did not take the necessary steps to ensure that community reinvestment gains of the last several years would be preserved and could be built upon.
In his testimony last week, Federal Reserve Chairman Alan Greenspan stated that HR 10 strengthened the CRA. He specifically indicated that HR 10 provides an incentive for holding companies to improve CRA performance of their depository subsidiaries since a rating of below Satisfactory could require holding companies to divest any poor CRA-performing bank or thrift. This is indeed a positive aspect of the bill, but it would be enforced rarely since more than 98 percent of banks and thrifts receive Satisfactory and above ratings. Chairman Greenspan, however, did not mention that HR 10 provides up to a 24 month grace period for holding companies to improve below Satisfactory ratings of any existing or acquired depository subsidiaries. This provision seriously dilutes the divestiture requirements because it delays penalties for CRA non-performance for a considerable time period. On balance, the incentives HR 10 provides for good CRA performance is overshadowed by the likely probability of substantial asset-shifting from bank and thrifts to non-depository institutions under the financial holding company structure.
Expansion of CRA to the new financial conglomerates, however, is not enough to allay NCRC's concerns about HR 10. 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. HR 10 veers too far towards lifting limits. For example, it 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 week hinted 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.
NCRC calls on the Senate 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. Does the recently enacted 25 percent cap on Section 20 revenue generated from securities operations preserve safety and soundness? 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? What would be the impact on working class Americans if the proposed lifting of caps goes forward?
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 recent Washington Post article. NCRC suggests a sober and incremental approach towards deregulating the financial industry. The banking industry has enjoyed five or six of its most profitable years in history. The bold deregulation proposed by HR 10 threatens to create an ailing industry that is unable to meet community reinvestment needs of neighborhoods across the country.
Extending CRA and adding safety and soundness safeguards will not be enough. HR 10 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. HR 10 must require a merger application process and a public comment period for all types of proposed mergers and combinations. Currently, the bill would allow bank holding companies to merge with non-depository institutions such as mortgage companies and insurance firms without submitting an application to federal banking agencies.
In the last few months, the announced megamergers have set new standards for bigness and the breadth and depth of their product offerings. Community and consumer protections are imperiled especially if financial modernization legislation promotes quick and cursory approvals that do not allow for sufficient scrutiny regarding the mergers' impacts on the level of competition, safety and soundness, and community reinvestment. Under HR 10, for example, the Citicorp and Travelers proposed merger may not even require an application since it involves a bank holding company combining with a company that is predominantly a non-depository institution. It is simply not possible for the Federal Reserve Board nor any other regulatory agency to preserve safety and soundness of these huge international conglomerates without a thorough review of merger applications. Moreover, without strong public policy initiatives and tough CRA enforcement, mergers and acquisitions will hasten disinvestment from low- and moderate-income communities.
A number of studies suggest that mergers and acquisitions decrease CRA performance, particularly in the small business lending area. Economists Joe Peek and Eric Rosengren of the Federal Reserve Bank of Boston suggest that the acquisition of small banks by their larger counterparts is troublesome for small businesses since small banks make most of their loans to small businesses. Of the eleven largest mergers in New England during 1993 and 1994 examined by Peek and Rosengren, 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.
Keeton's findings are supported by a new study conducted by economists Robert DeYoung, Lawrence Goldberg, and Lawrence White that also concludes that independent banks offer more small business loans than multibank holding companies. Finally, Federal Reserve economists Allen N. Berger, Joseph M. Scalise, and University of Chicago economist Anil K. Kashyap estimate that small business lending will continue to decline in the next three to five years at the same pace (about 33 percent) as the last five years. They hypothesize that much of the sharp drop of small business lending is due to industry consolidation and the disappearance of small banks.
A new report by NCRC member, the Woodstock Institute, reveals that the five banks issuing the highest numbers and percentages of their total loans to lower income neighborhoods in Chicago were banks with assets under $1 billion. In contrast, bank holding companies with more than $10 billion in assets made a relatively small proportion of their loans in these neighborhoods. As the Woodstock Institute's study suggests, the continued loss of small banks is indeed worrisome since small banks with less than $300 million in assets account for close to 50 percent of small business loans under $250,000, according to the Independent Bankers Association of America.
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. Since 1977, lenders and community groups have negotiated over $410 billion in CRA agreements. Most of the agreements occurred during the merger application process, and featured community-lender partnerships that preserved local branches, opened up community reinvestment offices, and established other innovative institutional arrangements that improved the community reinvestment performance of lenders.
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, has 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 protracted 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 will establish a $25 million fund for job counseling and retraining of former employees as well as promising to make $250 million annually in small business loans and $75 million annually in community development lending. Finally, 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 an arduous 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 bipartisan 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.
In detailed policy recommendations below, NCRC suggests 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. NCRC asks the Senate Banking Committee to conduct hearings on the effectiveness of bank regulatorsÕ enforcement of CRA.
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. In Spain, Benesto had a similarly spectacular collapse. Later, it was taken over by Banco Santandor, which had sold off all its non-financial businesses and invested the proceeds in our own First Fidelity.
Bank failures would be caused by bank and non-financial corporate combinations 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 romance with bigness involves notions of efficiency improvements due to economies of scale and protections from risk due to diversification. Economies of scale, however, are not always achieved by larger organizations. Within the banking industry in particular, size has consistently failed to realize efficiency gains. Reviewing banking industry studies conducted between 1980 and 1993, Federal Reserve economist Stephen Rhoades concludes that "...findings point strongly to a lack of improvement in efficiency or profitability as a result of bank mergers. These findings are robust within studies, across studies, and over time." Banks and non-bank financial corporations may perceive financial industry consolidation as an attractive means to increase market share and profitability. Whether it will increase overall economic efficiency is not at all clear. In fact, the available evidence suggests that it will not. And finally, if bank modernization is to avoid endangering the safety and soundness of the financial industry, it should not permit bank and non-financial corporate affiliations. Ample evidence from abroad indicates that rather than decreasing risk, this type of diversification only increases it.
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.
To reiterate, permitting combinations of banking and commerce is bad for everyone - consumers, and companies as well as small businesses in all neighborhoods. NCRC is pleased that the House adopted an amendment offered by Rep. Jim Leach (R-IA) prohibiting financial holding companies from acquiring non-financial corporations. However, NCRC is concerned that HR 10's grandfathering clauses are too generous as they permit holding companies to earn up to 15 percent of their revenues from non-financial companies for a period of 10 years with a possible five-year extension.
In order to protect consumers just like preserving the gains in small business lending, tough 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 nearly 4,000 "mystery" in-person visits, bank and thrift representatives did not disclose to potential customers that investment products including mutual funds were not federally insured 28 percent of the time. 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.
Proper consumer disclosure is particularly necessary in low- and moderate-income communities so that residents unfamiliar with financial products do not needlessly endanger their savings or pay more than prevailing market prices. Rep. John Dingell (D-MI) secured an amendment to HR 10 that mandates the implementation of new federal regulations that would ensure proper consumer disclosure. While this is a commendable step, NCRC believes that a "repeat offender" clause should be added; that is, if a bank is found by courts or regulatory agencies to have followed improper consumer disclosure procedures on two consecutive occasions, the holding company must cease engaging in the new financial activities permitted under HR 10.
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.
CRA has imposed obligations to serve the public because it has lead to enormous benefits for financial institutions and for the country as a whole. Banks have discovered that CRA lending is a profitable business and are starting to sell their CRA loans on Wall Street so that they can make more CRA loans. Would not other financial institutions also discover that community reinvestment requirements open up profitable business opportunities? In addition, financial institutions benefit from community reinvestment obligations because community reinvestment laws improve the overall economic and social health of the nation. Former Comptroller of the Currency, Eugene Ludwig, exclaims that the "democratization of credit," brought about by the CRA, benefits neighborhoods, regions, and the country by revitalizing depressed neighborhoods into vibrant communities with job growth and reduced levels of violence and crime.
Financial modernization creates an opportunity to even broaden the social benefits of community reinvestment obligations. If CRA obligations are extended to pension funds, mutual funds, and other non-depository institutions, the nation will experience a democratization of wealth. Millions of low-income Americans could have access to mutual funds, pension funds, and life insurance policies which will not only increase their wealth, but the wealth of the communities in which they reside. In a paper sponsored by the U.S. Department of Commerce, T.J. Eller and Wallace Fraser find that the median net worth of white households was about $46,000 while the median net worth of Black and Hispanic households was about $4,600 (or only one-tenth of their white counterparts). It is time to extend CRA to the rest of the financial industry in order to reduce the extreme inequalities in wealth that exist in this country.
Providing opportunities for wealth accumulation is the secret to this nation's prosperity and the unparalleled prosperity of its financial industry. What could be a better rationale for extending CRA?
In the last few years, gains in Community Reinvestment Act lending have been impressive. Lenders offered an incredible 67% increase in conventional home purchase loans to African-Americans, a 49% increase to Hispanics, and a 37% increase to low- and moderate-income households from 1993 to 1996. While impressive, the gains in community reinvestment lending are fragile. Even though CRA lending has proven to be profitable, banks and thrifts could once again neglect disadvantaged communities if HR 10 allows depository institutions to affiliate with financial companies exempt from CRA. 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
Data Disclosure
Regulatory and Structural Issues
1. Financial institutions must be required to submit a community reinvestment plan specifying the levels of home, small business, and community development lending offered to low- and moderate-income individuals and communities in metropolitan and non-metropolitan areas after the merger. The plan should also outline investments and services targeted to the traditionally underserved. A portion of any cost savings derived from the merger should be devoted to the community reinvestment plan, rather than solely accruing to the shareholders and senior management of the lending institutions.
2. Financial institutions should be required to discuss whether they intend to offer low-cost or no-fee checking and savings accounts, and ATM services.
3. Financial institutions must be required to disclose proposed branch closings by neighborhood so that the impact of closings on lower income and minority neighborhoods can be determined. The Officer of the Comptroller of the Currency requires a list of branch closings in an application. The four financial institution regulatory agencies are now considering adopting a common merger application form that would include mandatory reporting of branch closures.
4. All of the federal financial institution regulatory agencies must grant public hearings and extensions of public comment periods at the request of community groups and other members of the public. Currently, only the Office of Thrift Supervision has a mandatory requirement of this nature.
5. All of the federal regulatory agencies must conduct analyses on the level of competition on a city and neighborhood level in addition to their current multi-county and state level analyses. The recent Federal Reserve approval order of the First Union-Corestates merger seemed to dismiss anti-trust analysis conducted for smaller geographical areas although levels of concentration were much higher in Philadelphia than in the multi-county area surrounding the city
1. Examine the historical impact of bank mergers. In particular, the study must assess the impacts on lending, investments, services, branch accessibility, and fee levels in lower income and minority neighborhoods after mergers.
2. Examine the impact of mixing banking and commerce. NCRC believes that mixing banking and commerce would reduce economic efficiency by distorting the impartial allocation of credit and would decrease lending to small businesses in disadvantaged neighborhoods since bank holding companies would own small firms.
3. The GAO study should assess the progress made by the federal financial institution regulatory agencies in implementing the recommendations of the two previous GAO studies on CRA and fair lending (Community Reinvestment Act: Challenges Remain to Successfully Implement CRA, November 1995, and Fair Lending: Federal Oversight and Enforcement Improved but Some Challenges Remain, August 1996). These studies highlighted a lack of uniformity in examination procedures and quality problems associated with lending data. The next GAO report should ascertain if the regulatory agencies have enhanced their capacity to rigorously examine a banking industry that is becoming increasingly complex and consolidated. If these issues are not resolved, a situation is created "...in which the application and enforcement of (fair) lending laws vary by regulator," according to the GAO fair lending study.
4. Finally, the GAO study should examine safety and soundness issues associated with mixing
banking, insurance, and securities. Almost two years ago, the Federal Reserve Board
increased the amount of revenues that could be generated from securities activities from 10
percent to 25 percent in Section 20 subsidiaries. What has been the safety and soundness
impacts of this change? What would be the impacts of removing these limits altogether? Of
allowing bank operating subsidiaries in addition to affiliates to perform these activities?
1 In the House Banking Committee version of HR 10, the bill would have required financial holding companies to
have a demonstrable record of providing low-cost banking services. The current version of HR 10 allows holding companies to self-certify that they providing lifeline banking.
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