The financial needs of distressed communities have been on the front burner this Congress.

I applaud the President's desire to see expanded lending in these areas. I have also applauded his general desire to see community development banking legislation. We need a whole new effort to bring lending and productive energy to neighborhoods left behind by progress.

But the signs over the last several months have not been encouraging. In fact, I and others are wondering if we're not about to see substantially reduced opportunities for the residents of our distressed neighborhoods.

Missteps by HUD

Some of the most disturbing signs are coming from the Department of Housing and Urban Development. While one cannot blame the secretary for pursuing HUD's fair-housing objectives, intentional and unintentional signals sent to the marketplace have been disturbing. Two examples:

* First, HUD's rules on my Federal Housing Administration tiered-pricing law of 1990 have been so strict as to as to be described by a Clinton supporter, Democrat banking consultant Karen Shaw, as potentially chasing lenders away from the program.

While the law was designed to prevent FHA lenders from implementing discriminatory pricing rules, the regulations go well beyond the intent, and ought to be revised to conform more closely to the statute.

* Second, HUD's very public pronouncements that FHA lenders will face additional scrutiny seems designed to warn problem lenders -- and they do exist -- to stop redlining.

But many more good lenders already fed up with FHA's paperwork burden and fearing more paperwork and government micromanaging may remove themselves from the program. Other lenders considering entering the program will surely have second thoughts.

Fewer suppliers of FHA loans hurts, not helps, poor communities. The secretary must reconsider his approach, or at least reward good FHA lenders in a public way.

Again, HUD has legitimate objectives, but it can never be perceived as a leader in banking and lending policy.

Perhaps an illustration will help: A recent Clinton letter extolled the virtues of HUD in the community-development banking area, raising some eyebrows.

The President must tone down the increasing role of HUD and appoint a Federal Deposit Insurance Corp. head soon. The marketplace of lenders is nervous. An increasing public role for HUD in banking policy -- at the same time an FDIC chair sits vacant -- makes no sense.

Computer-based Lending

What HUD should do is quickly resolve any remaining difficulties with computer-originated loan regulations (part of the Real Estate Settlement Procedures Act) and tout this for what it is: a revolutionary new way to get a national credit system to underserved areas.

Early indications are that this new technology will increase consumer choice, make market rates more competitive generally, and increase the supply of mortgage money in neighborhoods where we have few traditional means of delivery. Many believe this system will substantially reduce discrimination in the home application process.

A software package linking borrowers to a national capital market and requiring only objective qualifying data does not see or care about the skin color of an applicant. Many woman and minority-owned banks are beginning to take advantage of GE's Residential Express program, to give one example.

Resolving this issue is the single largest difference HUD will make for lending policy in the short run.

CRA Reform

Moving away from HUD, the administration's Community Reinvestment Act reform proposal is due Jan. 1.

Regulators have ruled out even the modest safe harbor proposed by a bipartisan group of House members. Hopefully they will propose a a different form of CRA incentive, but early indications are that we will have none.

Some are worried we will only have an increased CRA burden, which clearly will do more harm than good for the intended beneficiaries. High, fixed costs in the banking industry are already driving banks away from low-balance loans, which low-income communities need more often than wealthy ones.

Another Regulator

Recent action by a Senate subcommittee will get some credit unions a new regulator: the Department of Health and Human Services. Language attached to a recent bill directs HHS grant funds to community-development credit unions. The policy has the backing of the White House.

Everyone knows that with money comes oversight, and with oversight comes more red tape, especially because HHS has a poor history with insured depository institutions.

The last time this was tried by HHS (then the Department of Health, Education, and Welfare), in the 1960s, many of the client credit unions federally insured -- failed.

The backers may view this policy change as new and innovative. But no one bothered appearing before Henry Gonzalez's Banking Committee to show it won't simply be a failed "War on Poverty" rehash with negative consequences for credit unions in distressed areas. (The White House apparently wants the credit union regulator, guardian of insured taxpayer funds, to "have no say" in the process.)

In its community bank proposal, the administration has advocated an almost complete removal of the conventional banking industry, saying that only specialized lenders are needed. Many expert community activists know that we need the involvement and capital of the mainstream lenders to make a difference.

The Senate's reported version of the bill is marginally better, but still sends the message that conventional banks are not full partners in our efforts to improve conditions via new models of lending.

Bank Enterprise Act

Finally, I call on the administration to clearly and forthrightly endorse the Bank Enterprise Act and work to install its board and secure funding. To date, I have received only the most modest of endorsements, backed by the substantial evidence that the administration hopes the implementation will never happen.

This law will reduce insurance premiums for FHA lenders doing a good job; reward conventional banks that capitalize on community-development lenders; and reduce costs for South Shore Bank, the example of activist, inner-city lending frequently cited by the President. In short, it is a central part of the solution we seek.

Balance Needed

It is time for the administration and its allies to recognize that lending to areas left behind by economic progress cannot simply be mandated by the federal government, with penalties to follow.

Only a balanced set of regulator-supervised incentives, technology improvements, and enforcement policies will get us to our goal. A more balanced pubic 1approach is needed now, before a new credit crunch descends on places that can afford it least.

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