As bank and thrift regulators wade through long hours of recent testimony on how to reduce the paperwork burdens of the Community Reinvestment Act while enhancing the performance measures, it's probable that heartburn will set in.

This discomfort will be the result of consuming volumes of testimony that do not address the real issues at hand.

Instead of trying to determine how to reduce the paperwork while improving the measures of performance, the focus should be on redefining safe and sound credit practices.

Over the years, community action groups, financial institutions, and the regulators have butted heads concerning making loans to minorities and low-to-moderate-income people.

Legal Terrorism

The community action groups seek access to the credit markets because it is the only vehicle available to improve the quality of shelter and/or life for several groups of people. Feeling blocked from the credit market, these groups have been forced into legal terrorism to try to force the industry to provide access to the credit market.

The banks and thrifts have dragged their feet because making such loans in the past has led to increases in loan-loss reserves or loan losses, or both. This has led to the widely acclaimed industry response that the only way to comply with CRA is to make bad loans.

The regulators charged with enforcing CRA, simultaneously with ensuring the safety and soundness of each institution, have tried to fulfill both charges. In doing so, they have caused examiners to be inconsistent in their application (of both charges). This has led all three groups to bash each other even more.

Bias in Boston

The Home Mortgage Disclosure Act findings of the last two years indicated that discrimination exists. This prompted the Federal Reserve Bank of Boston to assess several institutions' credit approving procedures.

Whereas most responses to the study focused on discriminatory application of established credit policies, more revealing was the fact that the use of a different set of credit approving standards is more telltale concerning creditworthiness for many minorities and low-to-moderate-income groups of people.

As such, the regulators and the industry have finally discovered what the community actions groups have known all along, that safe and sound loans can be made to minorities and low-to-moderate-income groups if the correct set of credit standards are developed and applied.

Added Documentation

Ironically, about the same time the Boston study was completed and released to the public, the regulatory agencies released the real estate lending standards mandated by the Federal Deposit Insurance Corp. Improvement Act. These standards made it clear a good real estate loan (or any loan) is supported by voluminous amounts of paper verifying that the borrower will likely repay the loan.

If the loan is not supported with such documentation, the loan will be classified during the next examination, unless the bank has stuffed it into the basket of "low doc" loans allowed by recent regulatory policy.

Nowhere in these real estate lending standards does it suggest that loans outside the mainstream of acceptable credit practices are acceptable and/or will not be classified.

As such, if a bank makes a loan for a. small-business startup with no track record or to a person whose credit is blemished in any way or whose payment-to-income ratio is above generally accepted levels, the loan will be classified and the institution will be required to reserve for future loan losses.

The Boston study and the real estate lending standards bring to the forefront the real issue: the clash between CRA compliance and the safety and soundness standards. In order for a true improvement of the CRA to occur, safety and soundness regulations will have to be revised as well.

If done, it is quite possible that it will be discovered that CRA need not be burdensome, because an appropriate set of credit standards developed for the unique characteristics minority and low-to-moderate-income groups just might become part of mainstream lending. Then, again, a cure for electoral epilepsy has not been found. As such, history suggests that Congress will have another seizure and prevent this from occurring.

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