Reform of the Community Reinvestment Act will create a dramatically different set of rules for banks next year, including a tough new enforcement plan that expands CRA penalities to all banks.

Regulators are preparing to make changes in Community Reinvestment Act enforcement, including one that will make all banks subject to penalties for noncompliance.

As it works now, CRA scrutiny occurs only when a financial institution seeks permission to expand. Regulators -- and community activists protesting the application -- can delay approval until CRA performance improves.

Speaking to a congressional panel last week, Comptroller of the Currency Eugene Ludwig conceded that this pattern of enforcement has been unfair and uneven.

"Institutions that are not planning to make any corporate applications have, until now, faced almost no consequences for unsatisfactory CRA performance, aside from the public relations," Mr. Ludwig said.

Policy Clarification

To remedy this, new CRA rules will enable regulators to take "credible enforcement action against institutions that have had persistently poor CRA performance," he said.

President Clinton, in conjunction with the release of his community development bank initiative, directed the four bank and thrift regulators last week to reform CRA so that it gives clearer guidance on how institutions will be evaluated, while cutting their paperwork burden.

Three Factors Emphasized

Mr. Clinton asked that examiners put more emphasis on three factors: the volume and geographical distribution of consumer and small-business loans for low-income customers and neighborhoods; the size of investments in community development projects in poorer neighborhoods, and the variety of services and products like counseling and basic banking available to underserved groups.

Mr. Ludwig said he wants the reform process to be a cooperative effort that includes both the banking industry and community groups, in addition to all the regulatory agencies. But the comptroller already has a clear set of goals in mind and is eager to quickly move forward, focusing on five areas:

* Developing performance-based standards that are more quantitative and objective, but still leave room for flexibility.

* Rewriting all of the agencies' examination procedures to make greater use of these quantifiable measures and reduse paperwork.

* Involving the public by meeting regularly with community groups and streamlining the process by which CRA records are made public.

* Developing expanded training programs for examiners; the OCC until now has not had specialized consumer compliance examiners.

* Strengthening enforcement, moving it beyond the application review process.

"The shift in emphasis will benefit everyone," Mr. Ludwig said, adding that the changes will "bring us much closer to the original intent of the Community Reinvestment Act."

The comptroller, Federal Reserve Board, Federal Deposit Insurance Corp., and Office of Thrift Supervision will formally begin working together this week to rewrite the regulations. The agencies have until Jan. 1 to finalize the new policies.

Competing Interests

Both industry officials and public advocates have applauded the President's desire to reform CRA. Nonetheless, both sides remain wary. Bankers don't want guidelines that are too rigid, and community groups don't want banks to be let off the hook completely in documenting their work.

"No one is in favor of leaving this law the way it is," said American Bankers Association president William H. Brandon. "We're pleased the President recognizes the problem and has targeted it for reform."

But "gauging performance is very difficult," the association head added. "If they're not careful, they could end uP on the road to credit allocation."

Irvin Henderson, chairman of the National Community Reinvestment Coalition, said: "Our only concern is the suggestion that reducing the alleged paperwork burden now required of lenders might be beneficial."

"How will the public, regulators, and others be able to accurately measure the true commitment of any lender in a given area without the necessary documentation?"

Concerns About Enforcement

And despite a new tenor among bank regulators on community issues, some activists remain concerned about the agencies' willingness to enforce CRA vigorously.

"Improving regulatory enforcement of CRA will not be easy, given the poor track record of the banking agencies in this area," said Allen Fishbein, general counsel of the Center for Community Change.

In revamping CRA standards, the regulators face the challenge of adding objectivity while recognizing the variety of lenders and communities that exist. Some industry officials question whether this will be possible.

"Lending conditions vary community by community, and trying to establish nationwide standards for community lending wouldn't work," said the ABA's Mr. Brandon. "Washington has better things to do than trying to determine the credit needs of every community in the country."

Need for Flexibility

Mr. Ludwig said the regulators are fully aware of that issue and will be sufficiently flexible to account for these differences.

"How any particular institution meets its CRA obligations will depend on a variety of factors, including its overall business strategy, size, financial resources, corporate structure, location, and the needs of the community in which it operates," he said.

Lenders and their critics agree that if the administration's CRA reform brings them together more frequently on friendlier terms -- as opposed to fostering only adversarial exchanges during bank application reviews -- the regulatory reform will most certainly make the law more effective.

"One of the principal goals of the President's reform initiative is to achieve a CRA rating system that commands respect from all parties," Mr. Ludwig said.

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