At the last possible minute on Jan. 19, the Clinton Treasury Department released its report on the Community Reinvestment Act mandated by the Gramm-Leach-Bliley Act.

Rushed as it was, the report got some things right — and others wrong.

The researchers at Harvard’s Joint Center for Housing Studies and the Brookings Institution broke some new ground for the Treasury report when they based their conclusions on careful data collection and analysis. For instance, they found that the amount of CRA-related home lending to low- and moderate-income communities and borrowers increased in metropolitan areas in which lending institutions and community groups negotiated CRA agreements.

Regression analysis also found that lending institutions made more CRA-related home loans in their CRA assessment areas than in their other areas.

The amount of CRA-related lending to low- and moderate-income communities increased in the suburbs, while it decreased in the inner cities, according to Treasury. In fact, CRA-related lending declined as the minority population increased in metropolitan areas. It appears that CRA-covered lenders are being muscled aside in minority and inner-city markets by subprime lenders.

Yet though the Treasury study reveals that we still need to make considerable progress in lending to minorities and inner-city neighborhoods, policymakers enact counterproductive policies.

For example, Gramm-Leach-Bliley’s so-called sunshine rule requires that all CRA agreements be disclosed to the federal government. Community groups do not mind disclosure. What they and banks will find a hindrance to future agreements is that the disclosure requirements are triggered by CRA-related speech stretching back three years before a CRA agreement is signed.

This not only infringes upon First Amendment rights but also will deter some banks and community groups from making agreements, since both parties will now have to institute wide-ranging systems for tracking conversations as well as dollars lent and spent.

The Treasury report fails to capture the full dimensions of the harmful effects of so-called sunshine. It also falls far short in sizing up the new requirement under Gramm-Leach-Bliley that banks have and maintain “satisfactory” CRA ratings in order to enjoy their new financial powers.

The report repeats assertions made by large banks that this “have and maintain” provision applies pressure to earn “outstanding” ratings so banks will be able to engage in new financial activities. However, it totally misses the recent Federal Reserve Board ruling that only the acquiring institution must have a “satisfactory” or better rating. The institution being acquired can have a failing CRA grade.

Since almost 100% of the large banks in this country have passing grades, it is much more likely (as in the recent Citigroup-Associates case) that the institution being acquired will have failed its exam.

The Treasury report also underestimates the impact of letting small banks undergo CRA exams once every four or five years, instead of every two years. Inside Mortgage Compliance recently reported that about 1,600 banks had CRA exams last year, down more than 50% from a year earlier.

The report asserts that the examiners will consider the CRA record over all the four or five years between exams, so the small banks will still need to prove sufficient CRA performance for the entire period. Well, we skeptics still believe that examiners and banks will have a tendency to discount performance in the first two years or so and concentrate on performance in the last two years or so before the exam.

This is particularly worrisome for rural banks. Recent research by Fairness in Rural Lending, a member of my group, the National Community Reinvestment Coalition, shows that subprime nondepository institutions have significantly higher market shares in rural areas than in metropolitan ones.

The Treasury report’s conclusions on “have and maintain” and small-bank exams are based on flimsy evidence. The report asserts that a follow-up study five years down the road should assess the impact of Gramm-Leach-Bliley on CRA performance. The reinvestment coalition agrees that only after this study is completed would we have enough solid data to compare the performance of banks that took full advantage of the law with those that chose to remain more within the realm of traditional lending. And only then would we have enough data on the performance of small banks to assess the impact of reducing by half the frequency of CRA exams.

Finally, the Treasury report shortchanged parties concerned with reinvestment by not making policy recommendations. So here are some:

• Since banks made more CRA-related loans in their CRA assessment areas, it is necessary to adopt new CRA regulations ensuring that Internet banks and other nontraditional lenders have assessment areas that cover most of their lending activity.

We favor the approach in the CRA Modernization Act of 2000, HR 4893, which requires banks to have assessment areas wherever their loans are more than half of 1% of the market (which can be a considerable number of loans in the case of large lenders).

• CRA exams must consider lending to minorities in addition to low- and moderate-income populations. We must do this since CRA-related lending activity now appears to be inversely related to minority presence in metropolitan areas. We must provide incentives for depository institutions to compete with the subprime lenders in minority and inner-city neighborhoods.

• Since CRA agreements boost CRA-related lending, repeal or greatly simplify the so-called sunshine disclosure requirements.

• Reestablish the every-two-years small-bank CRA exam.

• Fix the loophole that lets an acquired institution have a below-“satisfactory” rating.

• Finally, to ensure that Gramm-Leach-Bliley does not erode the level of CRA lending, apply CRA to insurance agents and other nontraditional lending affiliates in the new holding companies, as HR 4893 would do. The CRA as it is currently applied will not automatically cover the lending activities of mortgage companies, insurance agents, and other parts of the new holding companies. Inexplicably, the final Treasury report is silent on this most important issue.

Mr. Taylor is president and CEO of the National Community Reinvestment Coalition, a Washington trade group for 800 community orginizations and local public agencies.

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