WASHINGTON -- Regulators today will unveil a Community Reinvestment Act reform proposal that proponents claim will greatly expand credit to minority-owned businesses.
The new CRA rules will require banks to report race and gender information on smallbusiness loan applications.
"Within five years, you'll see at least a tripling of the volume of small-business loans to AfricanAmericans and Latinos," predicted Robert Gnaizda, general counsel of the Greenlining Coalition. "This step eliminates the legal and philosophical objections to this reporting."
The regulators' second attempt to revamp CRA will be open for comment through midNovember. The new plan is expected to incite a whole new round of controversy over CRA.
The increased data collection is likely to become a lightning rod for banker opposition while it empowers community groups.
The race and sex information could be used to prove discrimination against minority-owned business much the way Home Mortgage Disclosure Act data has been used to prove discrimination against minority homebuyers.
HMDA reports became leverage to spur mortgage lending to minorities and community activists are confident the same thing can happen with business lending. While bankers lost the battle over new reporting, regulators have agreed to junk the controversial market-share test.
Today's proposal also fleshes out the option to customize a bank's CRA compliance using the "strategic plan option." Finally, the 60% loan-to-deposit test was dropped from the streamlined CRA exams for banks with less than $250 million in assets.
After the original proposal was released in December, banks overwhelmed the agencies with 6,700 comment letters. Regulators last week tried in phone calls and meetings to convince trade association heads and community leaders to back the new proposal. The stroking seemed to work -- at least temporarily.
"We think we're going to come out better than we Were in the original proposal," said Allen Fishbein, general counsel at the Center for Community Change.
Edward Yingling, the American Bankers Association's executive director for government relations, said: "We're pleased they tried to address a number of our major concerns, but we're going to want to chew on it awhile before we have a reaction."
Mr. Yingling added that the ABA is concerned that the reporting requirements will remain too onerous for the industry to back CRA reform.
Regulators tried to soft-peddle the new reporting requirements last week. Comptroller of the Currency Eugene A. Ludwig called the format for the new data more "straightforward" than the original proposal.
Reporting race and sex on consumer loans will be voluntary under the new proposal. It would have been required under the original,
But banks will have to report race and sex data on business loans under $1 million. Under the December plan, banks would have been required to report this information on all loans to businesses under $ l million. Collecting by size of business would have been tougher because that is not how most banks track loans. The new proposal modifies the requirement so small business lending is reported by size of loan.
Mr. Ludwig has been the driving force behind CRA reform over the last 14 months. As the only Clinton-appointed regulator, he is under intense pressure to produce.
It was July 1993 when President Clinton called for CRA repairs and the creation of a network of community development banks to generate more lending to poor people. The president asked the regulators to rewrite CRA rules by January 1994. It took them nearly that long just to produce the original proposal.
What's worse, the development bank network was supposed to take more time because it required congressional action, but that legislation was signed into law Friday.
It will be yearend before CRA changes are finalized. The new rules will be phased in with new data collection to begin July 1, 1995, or six months after publication of final rules, whichever is later.
Exams enforcing the new CRA regulations would begin in July 1996, however banks could volunteer 'to use the new exams any time after next July.
Besides the clash between banks and community groups, CRA reform has been held up by differences between the Comptroller's office and the Federal Reserve.
The agencies fought for months over whether to put out a second plan and then over what to put in it. The introduction to the regulation alone runs 45 pages.
The main problem with today's CRA is inconsistent application by examiners. For example, does a bank merely have to meet with community groups to gauge the market's needs, or will the examiner demand a look at minutes from the gathering.
"The current rule is subjective in what's looked at and how that's interpreted," admitted Stephen M. Cross, the OCC's deputy comptroller for compliance management. "The new rule will be more clear about what the examiner looks at.
"CRA complaints in future will be that we didn't interpret the information right, not that we looked at the wrong things."
The new CRA proposal greatly expands the tools examiners can use to judge a bank's compliance with CRA.
The lending test will remain the most important for most banks, and it is this measure that includes the market-share test. But regulators have concluded that the market-share test is unworkable. How a bank's market share in low- and moderateincome areas stacks up against its share of high-income markets is too simple.
So the new proposal makes clear that the market-share test is just one of many measures an examiner may use to test compliance with CRA.
Other yardsticks of performance will include innovative loan programs, partnerships with community groups, and flexible underwriting standards.
A bank can' also earn points with examiners for such things as community development lending, which may be made in places that are not low-income or moderateincome. However, a retail bank must get a satisfactory grade on the lending test in order to earn an overall satisfactory CRA rating.
The investment test will look at the dollars dedicated to a community development bank or affordable housing purposes relative to a bank's capital.
The service test will check to see if a bank has branches in lowincome and moderate-income areas and if it actually serves the community.
Examiners will meld the three tests into one score with "lending as the baseline," Mr. Cross explained. "Lending should be the focal point."
However, with banks using the strategic plan option, the focus could shift to the investment test.
The strategic plan option allows a bank to create its own CRA test in consultation with community groups in its market. The plan must be approved by the. bank's regulators and it must include measurable goals for meeting the market's credit needs.
Clinton Appointees May Soften the Fed's Line on the Proposal
WASHINGTON -- Has the Federal Reserve Board's reaction to revamping community reinvestment rules mellowed any in the last nine months?
The governors meet at 2 p.m. today to vote on whether to publish the revised proposal for public comment. The central bank voted 6-1 to issue the original plan in December, but not before several governors ripped it apart.
While the central bank's governors are still expected to oppose new reporting requirements, the board's reaction today is likely to be tempered by the recent arrivals of Vice Chairman Alan Blinder and Gov. Janet Yellen.
These are President Clinton's first appointments to the board and they are more sympathetic to revamping CRA.
Mr. Blinder and Ms. Yellen met with a dozen community activists and minority advocates last week and pledged their support for CRA reform.
"This change in personnel is a breath of fresh air," said John Gamboa, executive director of the Greenlining Coalition, a San Francisco-based community group.
Mr. Gamboa said Mr. Blinder and Ms. Yellen told him the Coalition will be "a little bit happier" with the revised proposal.
"It remains to be seen how happy and for how long," Mr. Gamboa said.
Gov. Lawrence B. Lindsey is the Fed's main man on CRA and he is expected to support it although he is said to be concerned about increasing bank's reporting burden.
The governor who cast the lone vote against the original reform package is Wayne D. Angell and he is no longer a member of the board.
That leaves Gov. John P. LaWare .... a former banker -- to take on the plan to require banks to report race and sex information on small-business loans.
Mr. LaWare will return from a vacation in Ireland Monday and sources said he plans to blast the proposal.
It would be hard for him to top his criticism of December 1993, when Mr. LaWare said the proposal went beyond the CRA law.
"We are substantially amending the CRA to substitute the word 'bludgeon' for 'encourage,' "he said.