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The Color of Money

Day three, article one

A test that few banks fail -- in federal eyes

Regulators say 98% obey lending law,
but skeptics say communities shorted

By Bill Dedman, The Atlanta Journal-Constitution

Published May 3, 1988, Page A1

Copyright 1988, The Atlanta Journal-Constitution

Each year the U.S. government grades America's 17,000 banks and savings and loans on how fairly they serve their communities, including working-class and minority neighborhoods.

Across the country last year, 98 percent of the lenders passed. In the South, 99 percent passed, according to federal agencies.

Supporters of working-class and minority neighborhoods suspect grade inflation.

"Regulators seem to think we all live in Lake Wobegone. Like the children of that fictional village, U.S. lenders are all above average," said Sen. William Proxmire (D-Wis.), chairman of the Senate Banking, Housing and Urban Affairs Committee.

Besides the annual exams, regulators are required by law to consider lending patterns when a bank applies for approval of a special action, such as opening a branch or buying another bank.

In the past 10 years, regulators have denied eight of 50,000 special applications because of unfair lending, according to federal agencies.

"I wish I had graders like that when I was in school," Proxmire said. "And I ask myself, how is it that so many neighborhoods are continuing to fail, while so many lending institutions are continuing to pass?"

Although applications are rarely denied, the law does allow for delays while regulators consider citizen challenges of a bank's record. A delayed merger can cost a bank a bundle in lost profits. Increasingly, community groups are filing such challenges.

Banks resent the pressure.

"They're a pain in the neck, and as far as we're concerned it's pure ol' blackmail, and I think we are going to see a lot more of it," Edward Crutchfield, chief executive officer of First Union Corp., said in a speech to a bank marketing convention shortly before First Union moved to Atlanta in 1986.

"They said we did not have some specific things and they wanted $50 million -- boom. Well, we would have stayed awake until hell freezes over with that and we wouldn't have done it, and we didn't do it."

Other banks have done it. Banks have agreed to a variety of community demands:

-- Specific goals for residential and home-improvement loans: $150 million in Chicago, $50 million in St. Louis, more than $5 billion in all since 1977, according to researchers at the University of Minnesota.

-- In Iowa, a promise that a family with a broken furnace could get a $2,000 loan approved in 24 hours.

-- In St. Louis, low-cost checking accounts and cashing of government checks for non-depositors.

-- In Philadelphia, loans to multifamily buildings.

And in many cities and states:

-- Deposits of bank funds in community credit unions.

-- Credit counseling services.

-- Flexible underwriting criteria for loans to the poor.

-- Loans with lower interest rates or lower closing costs or lower down payments.

-- Charitable contributions to groups working in working-class and minority neighborhoods.

-- Automatic second appraisals if appraisals are disputed.

Community groups say these results have not come from blackmail, just good ol' American pressure. They do, however, use the phrase "pull off" for a successful bank challenge, the same phrase historically applied to a heist.

Instead of a gun they use the Community Reinvestment Act (CRA). Approved by Congress and signed by President Carter in 1977, the law doesn't require a bank to take any specific action or lend to anybody in particular. It creates no pool of money. It vaguely says banks have "an affirmative obligation" to serve all of their communities, including lower-income neighborhoods.

The law was intended to stop redlining, the illegal practice of avoiding areas in making loans because of race or other characteristics.

Ten years later, community groups around the country say redlining persists. Academic studies in Baltimore, Chicago, Denver and Washington, D.C., have found that banks rarely lend in working-class and minority neighborhoods. In Atlanta, even more than in these other cities, lending patterns follow racial lines, according to a study by The Atlanta Journal-Constitution.

The law has had beneficial effects, community groups say. But they say their victories came despite federal enforcement, not because of it.

"The regulators have been haphazard," said Allen Fishbein, general counsel for the Center for Community Change, a neighborhood advocacy group in Washington, D.C. "There's a pattern of the regulators being very close to the industry they regulate, being very reluctant to vigorously slap the wrist of people who violate the law. In many instances the regulators are defending the institutions more adequately than the lenders are defending themselves."

Safety of deposits comes first

"We're not consumer activists -- we're regulators," said Ronald Zimmerman, vice president of the Federal Reserve Bank of Atlanta. "It's a terribly subjective law to enforce."

Still, leaders of the national regulatory agencies agree they could do better. They say they have had their hands full with their primary duty, ensuring the safety of deposits in banks and savings and loans. The increasing number of bank failures in this decade has stretched their resources.

According to BankWatch, the Ralph Nader gadfly of the nation's banks, the number of examiner hours per year expended to check banks on compliance with consumer regulations fell by 74 percent from 1981 to 1984 at the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Federal Home Loan Bank Board, which regulate most of the banks and savings and loans. The Federal Reserve Board regulates only about 1,000 institutions.

"Our bank consumer compliance effort has not been as comprehensive as it should be," said William Seidman, chairman of the Federal Deposit Insurance Corp.

"As you are aware, in the early 1980s the thrift industry suffered a crisis," said Danny Wall, chairman of the Federal Home Loan Bank Board, which regulates savings and loans. "I regret to report that, as a result of this situation, we did not allocate sufficient resources to the enforcement of the CRA, or, for that matter, other consumer-related issues. The bank board has recently increased its activity in the area of CRA after a long lull. There is still much work to be done."

While the annual examinations have decreased, challenges from community groups have increased. For example, the Federal Reserve received three protests in 1984, 19 in 1985, 20 in 1986 and 35 last year. One reason is that more banks are merging or expanding into other states, creating more legal opportunities for challenges. Another reason is that federal housing aid has declined, causing community groups to seek more investment by banks in their neighborhoods.

Bankers who haven't been challenged should get their records in order before community groups start a protest, Glenn Loney, assistant director and community affairs officer of the Federal Reserve, told bankers in Philadelphia last year, according to American Banker, the industry newspaper.

"By the time they get to you in three years, they are really going to be good."

`Process somewhat abused'

In Atlanta last year, a new community coalition challenged SunTrust Banks, the parent of Trust Company Bank. Trust Company was able to complete the merger without making any specific financial concessions, but it left the yearlong negotiations bitter.

"The process has been somewhat abused," said Jim Graham, a SunTrust vice president in charge of compliance with the CRA. "The law is probably a good law but unnecessary. The banks have been meeting their community needs for some years."

That may be true of many banks, activists agree, but they say the law doesn't allow them to know which less-responsible institutions to challenge. The government keeps the grade for each bank a secret; not even the bank is supposed to know. Only regional and national totals are made public. The only information the public has is the federal reports of home loans, the same information that formed the basis for the Journal-Constitution study of lending patterns.

"It's the traditional style of the regulators to be low-key and behind the scenes, but that stuff should be public," Fishbein said. "It's not going to damage a bank. The public should know that, so they know where they put their money. It might even gain the good lenders some business. If it's secret, a lender can claim to have a good record when it doesn't."

Regulators say releasing the grades would set a precedent for disclosure of more sensitive examination information. They say the grades would be misinterpreted: Banks shouldn't be compared with each other, but with their legal responsibilities. And when a bank does poorly, regulators say, they don't have to give bad grades or turn down applications to enforce the law.

"Denials are a last resort," said Comptroller Robert Clarke, whose federal agency regulates more banks than any other.

"Instead of kicking you out of school because you flunked the course, we give you tutorials so you can stay in school," Martha Seger, a governor of the Federal Reserve, told the Senate Banking Committee last month.

The regional grades show that nine banks out of 792 in 10 Southern states received grades of "less than satisfactory" in 1986, the most recent data available. None was judged to be "unsatisfactory" or "substantially inadequate." Out of 318 savings and loans, four were graded as "needs improvement" and none was "unsatisfactory."

Activists scoff at the higher grades for Southern lenders.

"In the South and Southwest, particularly, you've had banks getting away with murder for years -- racial discrimination, redlining and dealing almost exclusively in commercial loans," said New Orleans neighborhood activist Michael Shea, national director of housing and banking campaigns for ACORN, the Association of Communities Organized for Reform Now. "I think the Atlanta Fed (Federal Reserve Bank) is shielding the banks from the public."

Regulators say evidence of disproportionate lending patterns is not enough to cause a bank to be penalized.

"It's not our job to allocate the credit geographically. We don't have hard and fast lines on that," Governor Seger of the Federal Reserve testified. Proposed changes in the law

This contentious triumvirate of bankers, community groups and regulators is lobbying now as Congress considers several proposals to improve enforcement of the CRA.

The lobbying battle is tied to expectations that Congress this session will probably change the rules on what business a bank can do. A bill approved by the Senate would permit bank holding companies to underwrite and sell mortgage-backed securities, commercial paper, municipal revenue bonds, corporate bonds, mutual funds, and perhaps eventually corporate stock, the most lucrative securities activity. A similar bill is pending in the House.

Viewing some form of expanded bank powers as apparently inevitable, community groups hope to slip in increased regulation through expansion of the CRA at the same time. Several bills to expand the law have been introduced in the House. Their provisions include these:

-- Change the grading system so only exemplary banks receive a top grade.

-- Disclose each bank's grade, as well as its CRA examination report.

-- Allow banks with a top grade to expand their powers or expand into other states. Banks with average grades could expand only if they made specific commitments to improve community reinvestment.

-- Create separate community affairs divisions in the four regulatory agencies to conduct the examinations separately from examinations for safety and soundness of banks.

-- Require banks to disclose their commercial loans by census tract, as they now must disclose home-purchase and home-improvement loans.

-- Require banks to provide low-cost "lifeline" checking accounts and to cash government checks for non-depositors with proper identification.

-- Establish a procedure for banks to notify the community and hear comments before they close bank branches.

Bank lobbyists have conceded that some of these changes are acceptable. The most disputed are the lifeline and check-cashing provisions, and some oppose the commercial loan disclosure.

Among the congressmen being lobbied is Rep. Pat Swindall, a Republican from metro Atlanta's 4th District. He is a member of the House Banking, Finance and Urban Affairs Committee, which is scheduled to consider the bills this month. His legislative assistant, Pete McLain, said Swindall has not taken a position on the bills.

"You've got to have some guidelines to protect these communities, but if you come in with too much regulation the banks will oppose it and you won't get a bill," McLain said.

Ranking higher on the House Banking Committee is another Georgian, Rep. Doug Barnard, a Democrat from Augusta who represents the 10th District. A banker by trade, he has been encouraging significant expansion of bank powers. He currently supports some provisions for increased consumer regulation, but not the lifeline and check-cashing provisions or commercial loan disclosure.

All sides suggest that this year is something of a last stand, because the law's most vocal and influential advocate in Congress, Proxmire, is retiring at age 72. He introduced the Community Reinvestment Act in 1977 to combat redlining and help revitalize inner cities.

"CRA was written, as I said 10 years ago, because `there is no way the federal government can solve that problem with its resources,' " Proxmire said. "The private sector has the capital, the know-how and the efficiency to do the job. But the record shows that we have to nudge them, influence them, persuade them to invest in their own community."


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