Small banks need quick relief from CRA requirements.

Secretary of the Treasury Lloyd Bensten's recent indication that the Clinton administration would support special treatment for Community banks under the Community Reinvestment Act comes not a minute too soon. In discussions with l wide range of community bankers, we find CRA compliance to be the single regulatory issue that most frustrates and indeed outrages senior management.

Banks and savings and loans are required by the Community Reinvestment Act of 1977 to help meet the needs of minorities and the poor in their service areas. But just how local banks should be living up to these obligations has become a matter of hot debate.

Stricter Standards

The CRA compliance standards for community financial institutions appear to have shifted dramatically higher in 1993. According to a 1992 analysis by the San Francisco Chronicle, nearly 90% of more than 9,000 rated institutions received the highest grades of "outstanding" or "satisfactory."

Today, without a change in business practices related to meeting the needs of the community, many of those same institutions have received "needs to improve" ratings.

At the same time that the Clinton administration is seeking to streamline banking regulations, compliance officers speculate that these downgrades are largely due to the government's increased emphasis on meeting credit needs.

The Wrong Medicine

"CRA is the wrong way to ease the credit crunch," said one community bank compliance officer in a recent discussion. "We should not be forced to make loans outside our charter in order to please Washington."

Clearly, CRA compliance is an inappropriate way to handle the credit crunch for community banks and for troubled lending institutions as well.

Take the case of Burlingame Bank in Burlingame, Calif., which is operating under a regulatory directive to reduce problem assets and improve capital ratios. A separate. FDIC CRA team suggested that the bank offer Small Business Administration loans below 20,000 and start-up business loans of less than $10,000 - neither of which the bank currently offers.

I hardly see it "safe" or "sound" for a bank operating under a regulatory order to be instructed to expand its product mix just because of the CRA. A bank operating under a regulatory order needs to rebuild without being forced to offer new products or enter new markets.

Ironically, minority banks, which are typically community banks, have had problems complying with CRA statutes enacted in part to encourage lending to minority communities.

Many of the banks now criticized by the federal regulators were granted bank charters specifically to serve a community that had been documented in the charter application and approved by the regulators as not being adequately served.

Chinatown Bank Singled Out

These communities include African Americans, Asians, Hispanics, East Indians, and others. One San Francisco institution in Chinatown was singled out in a CRA review for soliciting credit applications primarily from the Asian community, thus indicating a preference for one particular segment of the community.

Another Asian-focused San Francisco-based bank received a "satisfactory" CRA ruling in 1991, and yet two years later, the same bank, without changing its tending focus, received an "unsatisfactory" rating because of its focus on the Chinese community.

These lending preferences are in the banks' charters. That's largely why they are in business. The Community Reinvestment Act was established to encourage financial institutions to help meet the credit needs of local communities.

Now the regulators expect the black-focused community banks to have programs aimed at nonblacks, Asian-focused community banks to have programs aimed at non-Asians, and banks that were chartered to do private banking to make SBA loans as well.

Wasted Resources

Another major issue that arises when the CRA is applied to community institutions is the cost of compliance. One prominent banker, Robb Evans, speaking on behalf of Western Independent Bankers, said, "Getting a good rating on CRA largely depends on whether a bank is able to build large files of paperwork documenting low-income loans." As a result, he said, "compliance with CRA is actually a deterrent to community lending because it takes valuable resources away from making loans."

The typical community bank has assets under $500 million, offers a narrow product line in many cases, and is appropriately focused on working out problem loans. For banks under these circumstances, CRA documentation often becomes an unproductive burden.

I offer three recommendations:

* Exempt all institutions with assets under $150 million from the CRA.

* Temporarily exempt from CRA all institutions with assets under $500 million that are operating under regulatory orders.

* Develop regulatory guidelines that measure CRA compliance of minority focused institutions sorely against the community that these institutions were chartered to serve.

The Clinton administration needs to make broad reforms to streamline the application of CRA for community banks - and these reforms are needed now.

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