New rules would spur loans to small business - additions to the Community Reinvestment Act of 1977 - Symposium

Insight on the News, Nov 28, 1994 by Allen J. Fishbein

The emergence of strong, blackowned businesses in our inner cities is absolutely essential to the revitalization of distressed communities. Research shows that black owners consistently hire more minority workers than do white owners, thus making the expansion of this sector a key element of any successful strategy for opening up minority job opportunities. Consequently, new rules proposed by the Federal Reserve Board and three other banking regulators aimed at expanding credit availability for small businesses and firms owned by women and minorities are timely and necessary.

Since 1977 the Community Reinvestment Act, or CRA, has helped curb `redlining,' the discriminatory lending practice whereby banks refuse to make mortgage loans to people within certain geographies based on the ethnic or racial composition of those areas or the age of their housing stock. CRA requires lenders to take affirmative steps to help meet the credit needs of underserved areas.

By most accounts, CRA regulation has spurred new lending to credit-starved urban and rural communities across America, and it has done so in a way that makes money for banks by developing new markets. A recent survey of 42 banks conducted by the Bank Insurance Market Research Group, an independent company based in New York, found that 62 percent said that they were making money or expected to make money by lending to low-income and minority neighborhoods. Only 5 percent said that lending to people in those geographic areas represented a financial burden to them.

CRA directs the federal bank regulators to evaluate the extent to which banks are meeting local credit needs, including the needs of low- and moderate-income areas, consistent with safe and sound banking practices. The regulators must "take such account" before they grant requests by these institutions to expand, either by opening new branches or through mergers and acquisitions of one another. A weak CRA record may be grounds to deny an expansion request. The Center for Community Change has calculated that more than $30 billion have been committed to underserved areas by lenders through negotiated CRA agreements and unilateral lender commitments.

However, continuing concerns about the deficiencies in the rating system led President Clinton last year to instruct the regulators to develop CRA regulations that placed greater emphasis on actual performance and less emphasis on the process the lender goes through to achieve its record. Among other factors, the "reform" plan that was issued for comment last December proposed a comparative market-share test for assessing whether lenders were as active in low- and moderate-income areas as they were in more affluent areas.

The banking trade groups backed away and opposed the plan. Some even advocated retaining the existing system they had so strenuously criticized. In the face of this opposition, the regulators went back to the drawing boards and substantially rewrote the December 1993 proposal.

The revised proposal, released in late September, represents an about-face: It allows examiners more flexibility in selecting measures to assess a bank's CRA performance. The September rewrite, however, broke new ground in at least one area. Banks with assets of more than $250 million would need to collect race, ethnicity and gender data on small-business and small-farm loans. Aggregate information would be made public to the extent to which individual banks are lending to small businesses owned by minorities and women. The availability of this data could be used to focus the CRA evaluation process on small-business lending to these borrowers and to exert pressure on the federal government to go after lenders that discriminate.

The regulators also revised their proposal with respect to collecting information on the geographies in which a bank made its small-business loans. Under the revised proposal, banks would not have to publicly disclose their small-business lending on a census-tract basis. Instead, lenders would prepare aggregate reports showing the number and amount of small-business loans they made in low-, moderate-, middle- and upper-income groupings of census tracts.

Unfortunately, the new reporting requirements appear to have created a firestorm within the banking community and among several Fed governors and some business media. Objections fall into three categories: skepticism about whether discrimination in commercial lending is really a problem; fear that race and gender reporting will lead to emergence of loan quotas for different minorities; and concerns about a variety of technical and privacy issues. Let's review the evidence showing that these concerns are unfounded.

Plenty of signs exist to underscore the fact that discrimination in commercial lending continues to be a serious problem. Racial discrimination pervades virtually every aspect of our society, as evidenced by nationwide investigations of housing markets that point to discrimination aimed at African-Americans and Hispanics in about half the cases, according to a 1991 study by the Urban Institute.