After raising expectations about reforming the Community Reinvestment Act, Comptroller Eugene Ludwig and his band of regulators face the tough task of devising a rule that satisfies both bankers and public advocates.
Mr. Ludwig has pleased bankers by saying he wants to cut the documentation burden of the law. And he has thrilled activists by saying he wants to hold the industry to more objective, rigorous standards of performance.
But between those promises and the final reform, which President Clinton has asked regulators to finish by Jan. 1, lies a long road.
By the end of September, the banking agencies will have held seven public hearings around the country, met privately with both industry representatives and public advocates, and held countless internal meetings on the reform. By mid- to late October, they hope to have a proposal out.
Mr. Ludwig and the others leading the reform - Fed Governor Lawrence Lindsey. FDIC Chairman Andrew Hove, and OTS Director Jonathan Fiechter - recognize the challenge they face in balancing the concerns of both sides.
Not a Panacea
Already, at the regulators' first public hearing last week, Mr. Ludwig tried to dampen expectations.
"I know all the interested parties, banks and community groups alike, have high hopes and high anxieties about this reform," Mr. Ludwig said. "Because of those expectations, I think it is important to underscore here and now that this effort will not produce a panacea for anyone."
"In some respects," he added, "it is bound to disappoint everyone."
Some Common Ground
As demonstrated at the hearing last week, where industry and community activists laid out their demands, the groups so far have found only some common ground. One point both groups absolutely agree on? CRA doesn't work.
Both sides say more explicit guidance on what is expected of lenders is needed. And both fear that excessively rigid standards - explicit formulas for lending, for example - could destroy CRA.
Community groups and the banking industry also agree that CRA exams and examiner training need to be revamped. And most want other financial players - insurance companies, investment companies, and mortgage banks, for example - to be brought under the CRA umbrella.
"The law says a bank must help meet the credit needs of the community," said Joe Belew, president of the Consumer Bankers Association. "There ought to be some account taken of who else, besides banks, ought to help."
But beyond that, bankers' and advocates' paths diverge. The industry is hoping for a less burdensome rule, one that requires less paperwork and offers powerful incentives for good behavior.
Flexibility Sought
Lenders are also looking for a flexible rule that holds large and small banks in urban and rural communities to different standards. They want a banker friendly CRA.
"There are many different industries out there, and no one shoe will fit every financial institution," said Kenneth Guenther, executive vice president of the Indenpendent Bankers Association of America.
Community groups say adequate documentation is crucial, and incentives like exemptions for solid performance are totally off the table.
Greater Role for Public
What is needed, they say, is a greater role for public participation in determining CRA ratings, and greater access to information about the banks.
"As a minimal reform step, the agencies must vastly expand the opportunities for public comment on industry performance," said Chris Lewis, director of banking and housing policy at the Consumer Federation of America, at last week's hearing.
Many groups are even calling for greater disclosure of smallbusiness lending, which could lead to huge new documentation burdens for the industry.
Perhaps above all else, public advocates say a history of "regulator apathy" must be transformed, with the agencies committing themselves to tougher enforcement of the rule, penalizing lenders that don't live up to the law.
Demands and Promises
Bankers and advocates are intimately aware of each others' demands for reform. And they are equally aware of the promises regulators have made to the other. Mr. Ludwig has warned them to take a cooperative stance and keep an open mind about the process.
Nonetheless, both recognize that eventually Mr. Ludwig and his crew will face key decisions that demonstrate their fidelity to either the banking industry or the consumer advocates.
"The president has told the regulators that the result of this exercise has to be in the consumer's interest and in the interest of the communities," Mr. Lewis said. "That's the test."
And according to Mr. Guenther, "the way this is resolved is going to define the Clinton administration and their position on banking issues. This emerges as a very key test."
