The Community Reinvestment Act wasn't around in 1781, when America's first post-Revolutionary bank was founded, but CRA-type protests certainly were.

Back then, the protesters were not inner-city community groups but, rather, "country folk" whose complaints about a "drain of profits" from their territories presaged today's CRA debates.

The history is well chronicled in Bray Hammond's "Banks and Politics in America: From the Revolution to the Civil War" (Princeton University Press, 1957). Alexander Hamilton, serving during the Revolution under Gen. George Washington, sought a permanent private bank not only to help finance the war but also to represent the independence for which the young country was fighting.

New Credit Source

The financier Robert Morris, with the help of Benjamin Franklin and the French Treasury, capitalized the Bank of North America as a new source of credit for both the public and private sectors.

The bank's first three years of operation in Philadelphia, beginning in 1782, were so successful that it became a focal point of controversy between city and country.

The agrarian majority in the Pennsylvania Legislature felt that the aristocratic-seeming city bank's lending policies did little to help them. The bank's short-term loans (with a 45-day maturity) were a "discouragement to agricultural borrowing," according to Mr. Hammond.

Furthermore, a perceived diversion of resources to European stockholders didn't sit well with the bank's critics.

'No Favoritism'

Thomas Paine, Pelatiah Webster, James Wilson, and others defended the new bank by noting, among other things, that credit for city merchants indirectly benefited farmers who brought their products to market. All charges of favoritism at the bank were vehemently denied.

But in today's parlance, the Bank of North America probably would have been found in "substantial noncompliance" with the 1977 Community Reinvestment Act. That is, it is likely to have been substantially deficient in ascertaining and helping to meet the credit needs of its entire community, including low-and moderate-income areas.

We are not suggesting that the likes of Franklin, Hamilton, Morris, and other Founding Fathers were guilty of red-lining. Nonetheless, many farmers probably felt discriminated against simply because of where they lived and worked.

The Bank of North America was operated and partly owned by Philadelphia merchants and had its office in a prosperous central city. Therefore, it was not a question of alleged discrimination by race, religion, ethnicity, or the like - just plain geography.

Specialized Credit Sources

Robert Morris was the first to admit that his bank couldn't meet all the credit needs of farmers. He was likewise one of the first to see a need for specialized financial intermediaries. He suggested that banks be used for short-term credit in "favor of commerce" and that "loan offices" be used for long-term credit in "favor of the landed interest."

The Revolution-era banker went so far as to propose a tax to "establish a fund for the purpose of lending sums to farmers for the improvement of their lands." In other words, a federal farm financing agency.

The agrarian protesters were not asking, however, for revised loan policies, growth restrictions, or even a pledge for rural lending. They wanted to repeal the Bank of North America's charter! A two-year campaign beginning in 1785 resulted in repeal and a highly restrictive new charter that significantly weakened the bank.

A CRA-Type 'Success'

Therefore, our nation's first CRA-type protest "succeeded," in the political sense. But there really were no winners until the political balance tilted toward the growing cities, and the new bankers of a later age broadened their scope to serve a wider market.

Besides that first bank in Philadelphia, others soon formed in New York (progenitor of today's Bank of New York), Boston, and Baltimore. The original Bank of North America, which survived until 1929, was absorbed into other banks and ultimately into First Pennsylvania Bank, which is now owned by CoreStates Financial Corp.

The Bank of North America lives on, not only in a commemorative plaque at an office near Philadelphia's Independence Hall but also in sunny south Florida. M. Lee Pearce, a wealthy investor born and raised in Philadelphia, was chairman of the former Miami-based AmeriFirst Bank, the nation's first federally chartered savings and loan.

In 1990, he established a privately owned commercial bank in Fort Lauderdale, Fla., which he decided to call the Bank of North America. By buying the deposits of failed banks and thrifts at "fire-sale" prices from the government, the new institution quickly became South Florida's fastest-growing bank, as well as one of its most profitable.

CRA Roadblock to Growth

This bank's unprecedented growth through such purchases, to $500 million in assets in less than two years, apparently came to an abrupt halt when it received a "substantial noncompliance" CRA rating last September. Only two other Florida banks, in Jacksonville and Tampa, had received that low a rating.

Many similarities can be found between the first banks found to be in substantial noncompliance in south Florida and Southern California. Farmers and Merchants Bank of Long Beach, the first Southern California bank to get this rating, is the best capitalized big bank in California and also one of the most profitable. Like the Florida bank, the $1.4 billion-asset F&M Bank is privately owned.

Banks acting more like investment banks, making investments and buying loans rather than originating them in the local community, are susceptible to low CRA ratings.

Originating Few Local Loans

All but about 4% of the new Bank of North America's loans were bought from other institutions. And only one-third of the small number of loans it originated were made in the communities surrounding its 10 offices in Dade, Broward, and Palm Beach counties.

In other words, only $5 million, or roughly 1% of what was taken from those communities in the form of deposits, were being reinvested via local loans made directly by that bank. This proportion increased significantly, however, if purchased loans made by other banks were included.

Aside from its "unreasonable lending patterns," Bank of North America was criticized by federal bank examiners for making few loans in low-and moderate-income neighborhoods, "turning down" opportunities to participate in government or public programs, failing to assess the community impact of branch closings, and displaying "little intent" of participating in community projects.

But no evidence was found of any prohibited discriminatory or other illegal credit practice.

Frowning Federal Regulators

What happens to the 1% of banks that get a substantial noncompliance CRA rating? Besides public disclosure that these banks are not adequately serving community credit needs, a more serious effect exists.

Federal regualtors can deny, and frequently have denied, branch, merger, and other expansion plans of banks with low CRA ratings. This may be onerous, but it is a lot better than having a bank charter repealed as happened with the Florida bank's namesake more than 200 years ago.

The same federal regulators who let Florida's Bank of North America become one of its region's largest almost overnight are now effectively limiting any further growth because of the CRA finding.

Some banks, including F&M, have been upgraded as a result of their improved CRA performance. We understand that the Bank of North America hired outside CRA consultants and a new compliance officer, which, along with a refocused lending strategy and other improvements, are aimed at gaining a better CRA evaluation.

Depositors 'Vote' with Dollars

Meanwhile, management shouldn't be terribly concerned about any adverse publicity from the CRA rating - if the seemingly perverse experience of F&M Bank of Long Beach is any guide.

New deposits totaling $8 million flowed into that bank because its low CRA mark signaled that it was very strong and conservative, say top executives.

Like the original Bank of North America, the present one has run into a roadblock within its initial few years of operation because of its substantial deficiency in helping meet community credit needs.

Assuming it is upgraded after its next CRA evaluation, it should resume growing, just as the original Bank of North America came back after running into several roadblocks.

What's remarkable about CRA is that it wasn't until 1977, almost two centuries after our first bank of a modern type was founded, that this law was put on the books. It quickly became bankers' least favorite statute, never more so than in 1990 when CRA ratings first had to be publicly disclosed.

In 1991, 14 years after CRA was born, the banking lobby nearly persuaded the House and Senate to gut the law, in the view of many community leaders.

This effort continues, now with the full backing of the Bush administration, using the politically fashionable - and undeniably unnecessary - argument against the regulatory burden.

America is no different than most other countries in that it has always had groups that could be called "rich" or "poor."

An Unavoidable Conflict

As long as the credit-granting process is primarily in the hands of the former, the latter will likely not be satisfied that they're getting a fair shake. Many country people were dissatisfied 200 years ago, and many inner-city residents feel so today.

What makes America different is that we have a large and mobile middle class that softens potential class conflicts. Also, we are unique in that we have always lived by CRA-type principles - whether unwritten (pre-1977) or written - aimed at making the credit-granting process as fair as possible.

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