To the Editor:
John Taylor, president of the National Community Reinvestment Coalition, is justified in his concern over some of the Community Reinvestment Act provisions of recent financial reform [Treasury Underestimates the Damage that Gramm-Leach-Bliley Did to CRA, Feb. 2], but he is unjustified in his criticism of the new Treasury study on this topic.
That study, prepared by independent researchers at Harvard and the Brookings Institution, is a fairly well-balanced report that was not meant to appease community groups, banks, or regulators.
My independent research and two books on the CRA have concluded that good CRA public policy must be based on a careful balancing of and dynamic tension among the interests of these three corners of the CRA Triangle, rather than domination by any one special interest.
Mr. Taylors community-group perspective results in some CRA policy recommendations that are good, but others that are not.
He is correct, for example, in saying there is a need to reestablish more frequent smallbank exams, require that acquired banks have passing CRA ratings, and expand the CRA to cover the lending activities of financial holding company affiliates.
Surprisingly, he failed to mention the serious CRA grade-inflation problem and the need to convert the problematic large-bank investment test into a more responsive community development test, as proposed by the Federal Deposit Insurance Corp.
Mr. Taylors other recommendations, however, would not result in good CRA public policy:
His proposal to expand the CRA, an income-based law, to include race by considering lending to minorities in addition to low- and moderate-income populations is totally inappropriate considering the purpose and history of the law.
Unlike fair-lending laws, the CRAs race-blind basis is one of the reasons why it has achieved bipartisan support both from cities and rural areas. In fact, 60% of all low- and moderate-income individuals are non-Hispanic white, according to the CRA Handbook.
Mr. Taylors repeated criticism of subprime lenders is misguided, since some of the CRA lending to low- and moderate-income borrowers and areas is subprime. Worse yet are efforts to associate responsible subprime lending with predatory lending.
The recent Treasury report documents that virtually all the banks surveyed engage in subprime lending. In fact, those lenders expressed the fear that predatory lending legislation, which could expand into responsible subprime lending could reduce the availability of credit for individuals and households with poor credit histories.
The proposal to put additional CRA burdens on Internet banks, most of which are not even profitable, is regulatory overkill. Instead of being given a regional or even national assessment area or, worse yet, being forced into the regulatory morass of the CRA strategic plan option online banks should be evaluated under the community development test as proposed by the Office of Thrift Supervision.
The proposal that the sunshine provisions of the Gramm-Leach-Bliley Act be repealed is self-serving. The CRA Handbook documented the need to disclose financial agreements between community groups and banks. Regulators disclose their CRA ratings and a portion of their exams, and banks disclose their lending and CRA performance.
While the sunshine provisions may have to be tightened to ensure that they do not hinder any legitimate CRA activities, they should likewise be expanded to include agreements with nondepository institutions, such as mutual funds that are owned by or affiliated with banks.
The CRA is scheduled to undergo a major review next year, its first overhaul since July 1993, which culminated in the May 1995 regulations under which we currently operate. The 2002 reforms, like the previous ones, should make the CRA even better, as long as they balance the interests of community groups, banks, and regulators.
Kenneth H. Thomas
Finance lecturer
Wharton School
University of Pennsylvania
Philadelphia
