In keeping with their Scrooge-like reputation, banks for many year's viewed the Community Reinvestment Act as a form of forced charity.

Now that they take CRA more seriously, the relationship between inner-city credit extension and charitable giving has changed dramatically. As a result, bank donations are more meaningful and CRA lending is better focused.

"It'a coordinated approach," says Oliver Wesson Jr., president of J.P. Morgan Community Development Corp. "Using contacts from Morgan's philantropic programs means we can pick the type of people we do business with."

He estimates that 70% of MCDC loans are to recipients that had a previous relationship with Morgan's charitable giving.

Effort s Began in '70s

Morgan's community development corporation dates back to the early 1970s, when banks first took an interest in inner city lending. Chemical Bank started its "street bankers" program in 1969, which identifies lending and grant giving opportunities in poor neighborhoods.

After initiating these programs with much fanfare and hype, most banks let them lie fallow over the last two decades. But in 1989, a raucous alarm went off.

That year, the Federal Reserve Board rejected Continental Bank Corp.'s bid to acquire a bank in Scottsdale, Ariz. The Fed said Continental hadn't invested enough money in Chicago neighborhoods.

More Data Required

A few months later, Congress passed the thrift-bailout bill with an amendment requiring banks to give more information about the number of home loans made to whites and blacks.

CRA, once opaque and without real teeth, had suddenly come of age.

Banks, particularly large, urban institutions with a lucrative franchise to protect, scrambled to form community development corporations to specialize in low-income lending. Some banks hired community activists or local government officials with strong neighborhood ties to run their programs.

"Up until 1989 or 1990, most banks in America saw CRA as charity. A lot of banks' CRA statements were filled with charitable giving," says Thomas Kennedy, an episcopal minister who worked closely with community groups in Boston.

"But regulators were interested in credit extension," said Mr. Kennedy, now senior vice president in charge of charitable giving and CRA at BayBanks Inc., Boston. "The Continental decision awakened the banking community that the regulators were going to take CRA seriously."

Since joining the bank in 1990, Mr. Kennedy has supervised the opening of five new branches in low- and moderate-income Boston neighborhoods.

He has also overseen the installation of ATMs in poor areas of the city and the inauguration of a loan production office in Roxbury, a predominantly black neighborhood. Mr. Kennedy also spends a lot of time sensitizing board members at BayBanks subsidiaries about CRA.

Behind the Times

As innovative as Mr. Kennedy's work is, Baybanks still lags behind some money-center banks in its handling of CRA. Banks that still have one person responsible for both CRA and charitable giving are throwbacks to pre-1989 days, when banks did not understand the difference between the two or how they could work in tandem.

"CRA had been part of the philanthropic unit at Chase because, years ago, Chase and other banks believed they could address CRA though philanthropic programs," said David Ford, vice president and director of philanthropy at Chase Manhattan Bank. "In the last six years, that's changed. Now CRA is more heavily weighted toward making loans."

Getting religion in 1989 like many other institutions, Chase hired a former New York City Housing Agency official, Mark Willis, to set up its community development corporation. Mr. Willis was adamant that the bank view its inner-city lending like any other business unit.

"They didn't have a clear definition of community development at Chase before the creation of the CDC. They had the grants they made to museums, education, social services, and neighborhood groups. They thought that with these grants they were making a significant contribution to the city," Mr. Willis said.

"But community development is not charity. It's not just throwing money at projects. We have made $300 million in commercial construction loans and another $100 million in loans for affordable housing purely on a business basis. That's a commitment of $400 million of the bank's resource's while all of Chase's worldwide philanthropy is a tenth, as much," he said.

Of course, the CDCs are not as profitable as other units within the banks. But as J.P. Morgan's Mr. Wesson says, "we exepct to get a reasonable return."

At Chasel, Mr, Willis' CDC pioneers the urban wilderness to find worthy borrowers. If a community group cannot handle the responsibility of a loan but its work still merits aid, the Chase CDC will suggest it apply to Chase's philanthropy program.

At J.P. Morgan, just the opposite is true. Hildy Simmons has been running Morgan's philanthropic activities since 1987. She was called in to top-level meetings at the bank when the Fed turned down the Continental acquisition.

Ms. Simmons' department, officially called community relations, became the missionaries within the institution to make CRA an issue," she says.

Although MCDC's $56 million of assets dwarfs the $12 million Morgan will give-away this year, it is still the philanthropy program that has greater reach in the community.

"The community relations department is often the business development department for the MCDC," says Mr. Wesson.

Joint Venture

In what is a typical joint venture for the two Morgan units, the MCDC bought $250,000 in equity and deposits from the Community Capital Bank in Brooklyn. Ms. Simmons' department had also given a Community Capital affiliate $70,000 in charitable support.

The same goes for a Ben & Jerry's franchise in Harlem, which received a $65,000 equity investment from the MCDC while its employees benefited from a $30,000 training grant from Morgan community relations.

At New York-based Chemical Bank, charitable giving and the community development corporation are separate entities.

But both report to the same managing director, Carol Parry, who ran small-business lending at Manufacturer's Hanover before its 1992 merger with Chemical. Chemical's charitable giving will total $16 million this year, about half the amount that its CDC has in assets.

Broader Definition Urged

Ms. Parry points out that only 25% of Chemical's philanthropy is counted by the regulators in a CRA examination. Bringing the whole debate on charitable giving and CRA full circle, she insists that regulators need to have a broader definition of what community reinvestment is all about.

"We have argued that when you're making a grant to a community organization that provides drug abuse counseling, or racial harmony training or brings arts to an inner-city neighborhood, that should be counted as CRA-related," she says. "It's not just housing and jobs that make a community healthy."

Ms. Parry may get her wish. The Clinton administration is pushing for legislation that will force banks to spend more time investing in poor communities than than they do preparing for CRA exams.

Model Legislation

New York State banking legislation currently under review would give banks $7 in credit for every $1 donated to nonprofit community groups for CRA-related work.

Observers say it is likely the New York legislation will be a model when the House Banking Committee starts to write its own law. For her part, Ms. Parry is confident about the outcome.

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