Commentary: Don't Hold Bank Reform Hostage
In the heated battle over the Community Reinvestment Act and bank reform, both sides are playing rough. Senate Banking Committee Chairman Phil Gramm wants to roll back CRA, charging that community activists use the 1977 law to extract payoffs from banks that are eager to get mergers approved. The Texas Republican's stance has drawn not only a veto threat from President Clinton but busloads of protesters, who trampled the flower beds outside Gramm's Washington home one recent Sunday evening.
Gramm has yet to prove charges of CRA extortion. His staffers are probing $1 trillion worth of loans and contracts that banks have pledged during the past decade's merger fights. Even CRA advocates admit privately that some of these pacts have done more to buy activists' silence than to help underserved communities.
But even if these deals are squeaky clean, CRA shouldn't be holding up financial-services reform. Congress should study and debate CRA--whether it helps low-income home buyers and minority small businesses and whether a hidden tax on banks is the best way to achieve the act's objectives. But it can't do that when both parties are wielding CRA as a partisan weapon--and again risking the effort to overhaul bank laws.
Clintonites say CRA is working. They point with pride to exponential growth in loans attributed to CRA pacts--from $10 billion in 1993 to $700 billion last year. CRA needs to be expanded, they insist, to capture loan business that banks have lost. The House version of bank reform would extend CRA rules to a new class of "wholesale" banks--even though those banks wouldn't accept small deposits--and would let regulators fine or even shut down banks that don't meet CRA standards.OUT OF DATE. But extending CRA would undercut the goal of modernizing financial services. The act's basic notion--that banks suck cash out of a community and so must be forced to reinvest there--is wildly out of date now that deposits are gathered via the Internet and mortgages are resold around the globe. And efforts to stretch CRA to include other lenders will likely prove as futile as Congress' quarter-century struggle to keep up with the financial-services revolution.
In CRA's 22-year history, researchers haven't found much evidence that banks turn away good customers because of race or redlining. Among loans that wouldn't have been made without CRA, two studies found default rates six times higher than on comparable standard loans--a sign that banks weren't rejecting creditworthy borrowers. Mortgages, in particular, attract "hundreds and hundreds of bankers," says Emory University economist George J. Benston. "It's the last place where you'd find discrimination."
But Congress isn't debating CRA's value. Instead, it's pitting Clinton's desire to expand the law against Gramm's attempts to cut back enforcement. Both combatants should retreat to their corners. It's time to declare a CRA truce--and free the banking bill.By Mike McNamee