WASHINGTON - It's hard to overestimate the impact a Community Reinvestment Act protest can have on a bank.
Just look at how the Bronx-based Inner City Press/Community on the Move has used this weapon during the past six months.
The group has dogged Chase Manhattan Bank for refusing to commit more resources to the Bronx. Inner City Press has filed dozens of protests against every single application Chase has filed with any regulator, including New York State authorities, the federal banking agencies, and the Securities and Exchange Commission.
Inner City Press also caused massive headaches for Dime Savings Bank, which applied to acquire Anchor Savings Bank last winter. Dime eventually agreed to expand its presence in the Bronx on the eve of a rare CRA hearing before the Office of Thrift Supervision.
The group has become so skilled that some banks are settling before it even files a protest. Bank of New York inked a deal this month to install two ATMs and commit $15 million in loans to the borough.
CRA protests may be bringing an insidious side effect, said John P. LaWare, a former Federal Reserve Board governor who is now vice chairman of Secura Group. Banks appear to be making long-term loan commitments to resolve meritless CRA protests, he said.
"That is the sort of thing that is not good from a public policy point of view," Mr. LaWare said. "Banks shouldn't be coerced into anything just to make the noise level go down."
So what's the industry to do about CRA protests?
Community activists say the solution is simple: Serve low-income communities better.
"What we are asking of them is to market themselves and to lend," Inner City's executive director Matthew Lee said.
Banks, however, won't listen to these pleas unless a group has filed a protest, Mr. Lee said.
"A bank won't take it seriously," he said. "That's a shame."
As a result, the only way a community group can get negotiations going is to file a protest.
Bankers take a decidedly different view. They regard the protests as nothing less than shakedowns, and want safe harbors to protect them from the likes of Mr. Lee.
Legislation doing just that is in the works. Rep. Bill McCollum, R-Fla., and Rep. Doug Bereuter, R-Neb., are pushing language that would provide banks with top CRA records a safe harbor from community group protests.
Also, regulators could reform the protest system, allowing groups to attack CRA ratings rather than individual applications.
"The community groups shouldn't have any right to protest against the bank," said one South Carolina banker. "If they protest it, they should protest the regulator."
Unfortunately for bankers, neither option is likely.
The odds of CRA reform making it into law this year are slim, said Karen Shaw Petrou, president of the industry consulting firm ISD/Shaw Inc. The measure is currently tied to the regulatory relief bill - the current battleground in the fight over expanded bank insurance sales. Ms. Shaw said passage of that bill is unlikely.
On the second front, the industry effectively prevented regulators from adopting a ratings protest system when they asked Congress in 1989 to incorporate the change into the law. Ms. Petrou said the agencies now believe they lack the authority to make the change on their own.
But there is still hope for the industry, said Warren Traiger, a New York attorney who represents several banks on CRA issues.
The revised CRA rules that regulators adopted in April allow banks to devise their own compliance blueprints. This is known as the strategic plan option.
Housing groups could comment on the detailed plans of community lending, which go to regulators for final approval.
The option "is an impediment to a protest, because the plan is developed with the community and approved by the regulator," Mr. Traiger said. Protests would be moot unless a bank failed to meet its plan's objectives, he said.
