NCRC Testimony at Senate

June 23, 1998


TO: Friends of Community Reinvestment

FROM: John Taylor and Josh Silver


RE: NCRC Senate Banking Testimony



Dear Friends of Community Reinvestment:

The National Community Reinvestment Coalition (NCRC) will be testifying on
financial modernization legislation at the Senate Banking Committee this
Wednesday, June 24. Below, please find the testimony. We urge community
groups to weigh in with their Senators -- the Senate Banking Committee is
likely to mark-up a bil after the July 4 recess. Call us on 202-628-8866
if you have any questions.

Introduction

Good morning Chairman D'Amato, Senator Sarbanes, and distinguished members
of the Senate Banking Committee. My name is John Taylor, and I am the
President and CEO of the National Community Reinvestment Coalition (NCRC).
NCRC is the nation's CRA trade association composed of more than 670
community reinvestment organizations from inner city neighborhoods and
rural areas. NCRC's philosophy promotes pro-active partnerships among
banks and low-income and minority communities dedicated to increasing
access to capital and credit. As a trade association of neighborhood
organizations, NCRC has represented the community's perspective on the
Consumer Advisory Council of the Federal Reserve Board, Fannie Mae's
Housing Impact Advisory Council, Freddie Mac's Affordable Housing Council
and before Congress. I request that my written testimony be included as
part of the official record in the Congressional Record.

NCRC thanks you for the opportunity to testify before you today on a
subject, financial modernization, that has profound impacts on access to
capital and credit for this nation's underserved communities. Access to
banking products and services is fundamental. With access, our communities
thrive and create wealth through expanded homeownership opportunities and
small business creation. Without access to capital and credit, our
neighborhoods die. The contrast is that simple and stark among communities
with bank branches and those lacking them. And the contrast will become
even more apparent because of federal budget cuts to housing and economic
development programs. Private capital is the only true hope for
revitalizing our urban and rural areas. That's why NCRC has strongly
endorsed and promoted bipartisan initiatives such as Empowerment Zones that
leverage private capital for comprehensive neighborhood development.

Legislative and regulatory changes can have even more profound impacts on
access to capital and credit than subsidies for private sector investment.
For example, since its passage in 1977, the Community Reinvestment Act
(CRA) has leveraged over $410 billion in reinvestment dollars for home
loans, small business development, and community facilities in minority and
low-income neighborhoods across the country. In 1996, low- and
moderate-income families received more than 558,000 conventional home
purchase loans (these are private market loans without any government
guarantees). Also during 1996, 485,000 small business loans were issued to
entrepreneurs in low- and moderate-income census tracts. If lending
continues at this pace, about 6 million lower income families will enjoy
the American Dream of Homeownership, and almost 5 million small business
loans will be issued to struggling neighborhoods over the next 10 years.
CRA must evolve with the changes in the financial industry so that the
tremendous progress in reaching the traditionally underserved continues.

If capitalism is to be accessible for all Americans, CRA should be
protected and expanded during this era of public sector downsizing and
corporate upsizing (and consolidating). Welfare reform means that hundreds
of thousands of families will lose their benefits in a few years. How will
they become self-sufficient if they do not have access to small business,
student, or home loans? CRA has encouraged lenders to participate in
experiments with Individual Development Accounts (IDAs) and other tools
designed to lift people out of poverty. CRA has enabled communities to
revitalize themselves while decreasing their dependence on government
assistance.

CRA's genius is that it is a win-win for all sectors of society. CRA has
urged banks to find profitable opportunities serving minority and lower
income communities. Banks are starting to sell their loans on Wall Street
because they want more capital with which to make more CRA loans. CRA
improves our capitalistic system by opening up new markets for banks and by
spurring the creation of entrepreneurs in our nation's distressed
neighborhoods. CRA also removes market imperfections and barriers to
information. It benefits our economy because bankers and poor communities
are asked to establish relationships and overcome barriers to lending which
existed simply because of incomplete information flows. Economists and
political leaders should embrace CRA as the market-based solution to our
nation's economic and social problems.

Homeownership, small business ownership, wealth creation, pulling yourself
up by your own bootstraps - these are the reasons CRA has received
bipartisan support. This is why Representative Jim Leach (R-IA) has joined
his Democratic colleagues in supporting the expansion of CRA to wholesale
financial institutions. This is why Senator Arlen Spector (R-PA) raised
community reinvestment and anti-trust issues during the recent First Union
takeover of Corestates.

HR 10 Should Not be Approved Unless CRA is Expanded

NCRC's 670 community-based organizations strongly believe that HR 10 (the
Financial Services Act of 199 will erode the dramatic progress in
community reinvestment if CRA is not expanded to cover any financial
company allowed to affiliate with banks. NCRC is pleased that the current
version of HR 10 would expand CRA coverage to include wholesale financial
institutions, which would be a new type of investment banks that would not
be federally-insured and would be allowed to accept deposits greater than
$100,000. But the piecemeal expansion of CRA would allow credit unions,
mortgage companies, securities firms, insurance companies, and other
financial institutions to escape CRA coverage although they could affiliate
with banks. This would allow holding companies to shift assets away from
CRA-covered banks and thrifts into CRA exempt affiliates and subsidiaries.
Such asset shifting could significantly diminish the resources with which
banks and thrifts make CRA loans and investments. Surely, lawmakers do not
desire new institutional arrangements which stop the creation of jobs,
wealth, and small businesses in minority and lower income communities being
made possible by CRA.

Cross-ownership among banks, thrifts, and non-depository institutions is
likely to accelerate the drainage of assets out of banks and thrifts. In
1977, banks held 60 percent of the assets in the financial industry. In
1997, banks controlled only 27 percent of the total assets in the financial
industry. Mutual funds, pension funds, insurance products and other
financial instruments controlled the other 73 percent of assets. It is
likely that cross-ownership among financial institutions will only
intensify this asset shifting, and thus reduce the coverage and
effectiveness of CRA. In addition, CRA would not cover the checking,
lending, and other bank-like activities of mutual funds and other
non-depository institutions even though these entities would be able to
affiliate in an unlimited manner with banks.

Over in the House, several amendments were proposed that would allow CRA to
evolve with the structural changes in the financial industry that would be
accelerated under HR 10. Rep. Luis Gutierrez (D-IL) and Rep. Carolyn
Kilpatrick (D-MI) proposed an amendment that would have prevented financial
holding companies from engaging in newly authorized financial activities
unless the appropriate federal regulatory agency determined that all of
their depository subsidiaries and non-bank affiliates served the credit and
consumer needs of minority and lower income communities. Rep. Joseph
Kennedy (D-MA) introduced an amendment that would have required insurance
company affiliates of holding companies to offer policies in low- and
moderate-income communities, and that would have required securities
companies to demonstrate that their branch distribution network did not
arbitrarily exclude low- and moderate-income communities. In addition,
Rep. Kennedy offered an amendment that would have prevented an insurance
company from affiliating with a financial holding company if a court found
that it had violated the Fair Housing Act and if the insurance company then
did not comply with any consent decrees. Finally, Rep. Maxine Waters
succeeded in attaching a requirement to HR 10 that holding companies offer
lifeline (low cost) checking accounts. The Gutierrez and Kennedy
amendments were not allowed to be considered on the House floor while the
Waters' amendment was diluted in final House passage of the bill. In sum,
the House did not take the necessary steps to ensure that community
reinvestment gains of the last several years would be preserved and could
be built upon.

In his testimony last week, Federal Reserve Chairman Alan Greenspan stated
that HR 10 strengthened the CRA. He specifically indicated that HR 10
provides an incentive for holding companies to improve CRA performance of
their depository subsidiaries since a rating of below Satisfactory could
require holding companies to divest any poor CRA-performing bank or thrift.
This is indeed a positive aspect of the bill, but it would be enforced
rarely since more than 98 percent of banks and thrifts receive Satisfactory
and above ratings. Chairman Greenspan, however, did not mention that HR 10
provides up to a 24 month grace period for holding companies to improve
below Satisfactory ratings of any existing or acquired depository
subsidiaries. This provision seriously dilutes the divestiture
requirements because it delays penalties for CRA non-performance for a
considerable time period. On balance, the incentives HR 10 provides for
good CRA performance is overshadowed by the likely probability of
substantial asset-shifting from bank and thrifts to non-depository
institutions under the financial holding company structure.

Safety and Soundness Issues Need to be Addressed

Expansion of CRA to the new financial conglomerates, however, is not enough
to allay NCRC's concerns about HR 10. NCRC believes that policymakers have
not addressed the safety and soundness issues associated with unlimited
cross-industry ownership. The recent experience after the California
earthquake illustrates the serious risks associated with financial
behemoths. After the earthquake, the Fire and Casualty subsidiary of State
Farm processed claims almost equal to the assets of the subsidiary. What
would happen in future emergencies when banking is mixed with insurance
underwriting? Would the holding company draw down the resources of
federally-insured depository subsidiaries to bail out the insurance
affiliates? Would this leave the depository institutions in precarious
financial condition?

Prudent limitations on non-banking activities are maintained in order to
preserve safety and soundness. HR 10 veers too far towards lifting limits.
For example, it would allow Section 20 subsidiaries to earn all of their
revenue from securities operations. What seems more important than the
affiliate versus subsidiary issue is the limitations on cross-industry
ownership. Caps on the amount of non-banking activities conducted by
subsidiaries and affiliates are designed to prevent financial difficulties
by limiting the losses associated with riskier activities. But if these
limitations are lifted, federally-insured institutions become dangerously
exposed to sudden crises that can wipe out assets in one fell-swoop.
Federal Reserve Chairman Alan Greenspan in his testimony last week hinted
that "losses in, for example, securities dealing or fire and casualty
insurance underwriting conducted in an operating subsidiary could occur so
rapidly that they could overwhelm the bank parent before actions could be
taken by the regulator." Likewise, NCRC believes that in times of crisis,
holding companies would not refrain from raiding federally insured
affiliates although affiliates are supposed to have stronger firewalls.

NCRC calls on the Senate to ask the General Accounting Office (GAO) to
thoroughly examine the safety and soundness issues and to make
recommendations regarding prudential limits on cross-industry ownership.
Does the recently enacted 25 percent cap on Section 20 revenue generated
from securities operations preserve safety and soundness? What has been
the safety track record of Section 20 subsidiaries since the Federal
Reserve Board increased the cap to 25 from 10 percent in December of 1996?
What caps would work for insurance affiliates and subsidiaries? What is
the experience abroad with fewer limitations and safeguards? What would be
the impact on working class Americans if the proposed lifting of caps goes
forward?

Japan, which has a more deregulated banking system than the United Sates,
is confronted with $600 billion worth of bad loans. Relative to the size
of its economy, Japan's crisis is six times as bad as our S&L crisis was,
according to a recent Washington Post article. NCRC suggests a sober and
incremental approach towards deregulating the financial industry. The
banking industry has enjoyed five or six of its most profitable years in
history. The bold deregulation proposed by HR 10 threatens to create an
ailing industry that is unable to meet community reinvestment needs of
neighborhoods across the country.

Impacts of Consolidation and Mergers on CRA Performance and Enforcement

Extending CRA and adding safety and soundness safeguards will not be
enough. HR 10 will intensify the rate of consolidation in the financial
industry by authorizing additional combinations of banking, insurance, and
securities operations. In this environment, CRA enforcement must be
toughened. Mergers will lead to declines in CRA-related investments and
loans if regulatory enforcement is lax and citizens do not have
opportunities to make their views known during the merger application
process. HR 10 must require a merger application process and a public
comment period for all types of proposed mergers and combinations.
Currently, the bill would allow bank holding companies to merge with
non-depository institutions such as mortgage companies and insurance firms
without submitting an application to federal banking agencies.

In the last few months, the announced megamergers have set new standards
for bigness and the breadth and depth of their product offerings.
Community and consumer protections are imperiled especially if financial
modernization legislation promotes quick and cursory approvals that do not
allow for sufficient scrutiny regarding the mergers' impacts on the level
of competition, safety and soundness, and community reinvestment. Under HR
10, for example, the Citicorp and Travelers proposed merger may not even
require an application since it involves a bank holding company combining
with a company that is predominantly a non-depository institution. It is
simply not possible for the Federal Reserve Board nor any other regulatory
agency to preserve safety and soundness of these huge international
conglomerates without a thorough review of merger applications. Moreover,
without strong public policy initiatives and tough CRA enforcement, mergers
and acquisitions will hasten disinvestment from low- and moderate-income
communities.

A number of studies suggest that mergers and acquisitions decrease CRA
performance, particularly in the small business lending area. Economists
Joe Peek and Eric Rosengren of the Federal Reserve Bank of Boston suggest
that the acquisition of small banks by their larger counterparts is
troublesome for small businesses since small banks make most of their loans
to small businesses. Of the eleven largest mergers in New England during
1993 and 1994 examined by Peek and Rosengren, eight of the post-merger
institutions decreased their small business lending. Similarly, Federal
Reserve economist William Keeton found that bank consolidation decreased
small business lending in the Midwest and Mountain states. Keeton's study
showed that the greatest difference in small business lending was among
independent banks that had a small business loan (defined as a loan less
than $100,000) to deposit ratio of 6.6% and out-of-state multi-bank holding
companies with a ratio of 4.7%. In other words, the interstate merger
trend is creating precisely the type of bank least likely to lend to small
businesses.

Keeton's findings are supported by a new study conducted by economists
Robert DeYoung, Lawrence Goldberg, and Lawrence White that also concludes
that independent banks offer more small business loans than multibank
holding companies. Finally, Federal Reserve economists Allen N. Berger,
Joseph M. Scalise, and University of Chicago economist Anil K. Kashyap
estimate that small business lending will continue to decline in the next
three to five years at the same pace (about 33 percent) as the last five
years. They hypothesize that much of the sharp drop of small business
lending is due to industry consolidation and the disappearance of small
banks.

A new report by NCRC member, the Woodstock Institute, reveals that the five
banks issuing the highest numbers and percentages of their total loans to
lower income neighborhoods in Chicago were banks with assets under $1
billion. In contrast, bank holding companies with more than $10 billion in
assets made a relatively small proportion of their loans in these
neighborhoods. As the Woodstock Institute's study suggests, the continued
loss of small banks is indeed worrisome since small banks with less than
$300 million in assets account for close to 50 percent of small business
loans under $250,000, according to the Independent Bankers Association of
America.

Small business lending declines after a merger because it is a type of
lending that depends on intimate knowledge of community residents and
businesses that only loan officers in local branches possess. After
mergers and acquisitions, decision-making is often centralized in
headquarter offices located hundreds of miles away from what used to be the
local branch office. Local CRA-related lending and investing can be
protected only by a thorough merger application process that allows
regulatory agencies, community groups, and lenders to figure out how CRA
performance can be strengthened after dramatic institutional changes
following mergers. During the merger application process, community groups
and lenders will sign CRA agreements specifying multi-year commitments to
offer housing, small business, and community development loans and
investments. Since 1977, lenders and community groups have negotiated over
$410 billion in CRA agreements. Most of the agreements occurred during the
merger application process, and featured community-lender partnerships that
preserved local branches, opened up community reinvestment offices, and
established other innovative institutional arrangements that improved the
community reinvestment performance of lenders.

Community group input regarding the First Union-Corestates merger is an
example of how CRA gains can be preserved by a participatory merger
application process. First Union, a regional bank that competes vigorously
with Nationsbank, has just taken over Corestates, the last regional bank
headquartered in Philadelphia. This merger posed significant dangers to
the economy of Pennsylvania, as it involved the potential closure of
hundreds of branches and the loss of thousands of bank jobs.

After protracted negotiations between community organizations and First
Union, the bank agreed to offer $250 million annually in home loans in
Pennsylvania to low- and moderate-income borrowers. This was a slightly
higher level than First Union and Corestates was offering before the
merger. In addition, the bank will establish a $25 million fund for job
counseling and retraining of former employees as well as promising to make
$250 million annually in small business loans and $75 million annually in
community development lending. Finally, the bank agreed to offer a free
checking account and to adopt a "no-fee" ATM policy.

The First Union CRA agreement was the result of an arduous process. The
Federal Reserve Board, which was the lead federal regulator on this merger,
grudgingly held public hearings on the merger and extended the public
comment period, but only after a public outcry from more than 100 community
groups and after the intervention of Pennsylvania's two U.S. Senators and a
bipartisan group of elected officials. In addition, the Attorney General
of Pennsylvania will enforce the terms of First Union's agreement,
especially the "no fee checking and ATM" provisions for low-income
recipients of Social Security and other federal benefits.

Why did it require the intervention of U.S. Senators and state and local
officials to ask the Federal Reserve Board and the bank to seriously
consider the merger's ramifications to traditionally underserved
communities? This process of preserving community reinvestment should be
an automatic component of the merger application procedure; it should not
be an excruciating exercise that depends on the good will of elected
officials.

In detailed policy recommendations below, NCRC suggests that the merger
application process must include public hearings and the submission of
community reinvestment plans by the merging banks. Since it is clear that
bank modernization legislation will intensify the pace of consolidation in
the financial industry, public policy must counter the strong forces
accompanying consolidation that hasten disinvestment from our nation's
underserved communities. NCRC asks the Senate Banking Committee to conduct
hearings on the effectiveness of bank regulators' enforcement of CRA.

Combinations of Financial and Non-Financial Companies

In many areas, bank modernization's winners and losers will depend on the
regulatory framework that accompanies modernization. In one aspect though,
it is clear what the impact of bank modernization is. Proposals to allow
combinations of financial and non-financial companies are harmful to
everyone - communities and corporations alike.

Safety and soundness in the financial industry will deteriorate
significantly if financial holding companies are allowed to affiliate at
all with non-financial corporations. We should learn from the mistakes of
foreign countries who have had particularly disastrous experiences allowing
combinations of financial and non-financial companies. In Finland,
combinations of commerce and banking resulted in losses that in proportion
exceeded our savings and loan crisis. One of the world's biggest bank
failures totaling $14 billion involved the Credit Lyonnais in France which
was a banking and commerce conglomerate. In Spain, Benesto had a similarly
spectacular collapse. Later, it was taken over by Banco Santandor, which
had sold off all its non-financial businesses and invested the proceeds in
our own First Fidelity.

Bank failures would be caused by bank and non-financial corporate
combinations because banks would no longer impartially allocate credit.
They would be motivated to extend credit to their non-financial affiliate
even if other businesses may be more creditworthy. If a non-financial
affiliate of a bank is mismanaged, the bank has an incentive to continue
financing it in hopes that its condition improves. More credit, however,
simply feeds the mismanagement rather than rectifying it. Thus, huge bank
and non-bank conglomerates fail because the non-financial affiliate is
never subjected to the discipline of receiving less credit or no credit
until its managerial practices improve. Overall economic efficiency
declines in countries with bank and non-financial conglomerates.

The romance with bigness involves notions of efficiency improvements due to
economies of scale and protections from risk due to diversification.
Economies of scale, however, are not always achieved by larger
organizations. Within the banking industry in particular, size has
consistently failed to realize efficiency gains. Reviewing banking
industry studies conducted between 1980 and 1993, Federal Reserve economist
Stephen Rhoades concludes that "...findings point strongly to a lack of
improvement in efficiency or profitability as a result of bank mergers.
These findings are robust within studies, across studies, and over time."
Banks and non-bank financial corporations may perceive financial industry
consolidation as an attractive means to increase market share and
profitability. Whether it will increase overall economic efficiency is not
at all clear. In fact, the available evidence suggests that it will not.
And finally, if bank modernization is to avoid endangering the safety and
soundness of the financial industry, it should not permit bank and
non-financial corporate affiliations. Ample evidence from abroad indicates
that rather than decreasing risk, this type of diversification only
increases it.

The entry of banks into non-financial activities will impede the growth of
the small business sector. Banks would favor their commerce affiliates over
independent small businesses in their lending and investing decisions.
Small businesses in lower income and minority neighborhoods will be
particularly disadvantaged since they have the greatest need for loans.
Allowing banks to aggressively enter the non-banking industry thwarts the
CRA's emphasis of small business development in inner city neighborhoods
and underserved rural areas.

To reiterate, permitting combinations of banking and commerce is bad for
everyone - consumers, and companies as well as small businesses in all
neighborhoods. NCRC is pleased that the House adopted an amendment offered
by Rep. Jim Leach (R-IA) prohibiting financial holding companies from
acquiring non-financial corporations. However, NCRC is concerned that HR
10's grandfathering clauses are too generous as they permit holding
companies to earn up to 15 percent of their revenues from non-financial
companies for a period of 10 years with a possible five-year extension.

Consumer Disclosure Issues

In order to protect consumers just like preserving the gains in small
business lending, tough new regulatory and legislative initiatives will
have to accompany bank modernization legislation. Financial holding
companies will be able to offer a dizzying array of bank, security, and
insurance products while worrisome evidence abounds that the banking
industry is not properly disclosing the risk associated with nondeposit
investment products. An FDIC-sponsored survey, which is regarded as the
most comprehensive monitoring study to date, found that in nearly 4,000
"mystery" in-person visits, bank and thrift representatives did not
disclose to potential customers that investment products including mutual
funds were not federally insured 28 percent of the time. In the almost
4,000 telephone calls by "mystery" customers, representatives of lending
institutions did not properly disclose information to customers an
incredible 55 percent of the time.

Proper consumer disclosure is particularly necessary in low- and
moderate-income communities so that residents unfamiliar with financial
products do not needlessly endanger their savings or pay more than
prevailing market prices. Rep. John Dingell (D-MI) secured an amendment to
HR 10 that mandates the implementation of new federal regulations that
would ensure proper consumer disclosure. While this is a commendable step,
NCRC believes that a "repeat offender" clause should be added; that is, if
a bank is found by courts or regulatory agencies to have followed improper
consumer disclosure procedures on two consecutive occasions, the holding
company must cease engaging in the new financial activities permitted under
HR 10.

Public Obligations of Financial Institutions

Some laissez-faire proponents of financial modernization ask why should
financial institutions be subjected to community reinvestment obligations.
Financial institutions have an obligation to serve all segments of the
population because governments nurture their growth and protect their
assets. Federal and state governments use their authority as
representatives of the citizenry to grant financial institutions charters.
In other words, financial institutions have an obligation to serve all
members of the public because the citizenry allowed them to exist. Section
802 of the Community Reinvestment Act creates a legal obligation on the
part of depository institutions "to serve the convenience and needs of the
communities in which they are chartered." Chartered is the key word; all
other non-bank financial institutions also receive their right to exist
through a publicly granted charter. Therefore, they should have a legal
obligation to serve the financial needs of the communities in which they
are chartered.

The public, through their government agencies, protects the safety and
soundness of chartered financial institutions. Policymakers first applied
CRA to depository institutions because federal deposit insurance is
ultimately backed by the taxpayers. Yet, Mark Pinsky's and Valerie
Threlfall's article for the National Association of Community Development
Loan Funds points out that most non-bank financial institutions also
receive substantial government protections. For example, according to
Pinsky and Threlfall, the Securities Investor Protection Corporation has
the authority to borrow up to $1 billion dollars from the U.S. Treasury in
order to reimburse investors of insolvent brokerage firms. Likewise, the
insurance fund for pension plans has a line of credit from the U.S.
Treasury that can be used in emergencies.

Expanding CRA Would Increase Wealth for Millions of Americans

CRA has imposed obligations to serve the public because it has lead to
enormous benefits for financial institutions and for the country as a
whole. Banks have discovered that CRA lending is a profitable business and
are starting to sell their CRA loans on Wall Street so that they can make
more CRA loans. Would not other financial institutions also discover that
community reinvestment requirements open up profitable business
opportunities? In addition, financial institutions benefit from community
reinvestment obligations because community reinvestment laws improve the
overall economic and social health of the nation. Former Comptroller of
the Currency, Eugene Ludwig, exclaims that the "democratization of credit,"
brought about by the CRA, benefits neighborhoods, regions, and the country
by revitalizing depressed neighborhoods into vibrant communities with job
growth and reduced levels of violence and crime.

Financial modernization creates an opportunity to even broaden the social
benefits of community reinvestment obligations. If CRA obligations are
extended to pension funds, mutual funds, and other non-depository
institutions, the nation will experience a democratization of wealth.
Millions of low-income Americans could have access to mutual funds, pension
funds, and life insurance policies which will not only increase their
wealth, but the wealth of the communities in which they reside. In a paper
sponsored by the U.S. Department of Commerce, T.J. Eller and Wallace Fraser
find that the median net worth of white households was about $46,000 while
the median net worth of Black and Hispanic households was about $4,600 (or
only one-tenth of their white counterparts). It is time to extend CRA to
the rest of the financial industry in order to reduce the extreme
inequalities in wealth that exist in this country.

Providing opportunities for wealth accumulation is the secret to this
nation's prosperity and the unparalleled prosperity of its financial
industry. What could be a better rationale for extending CRA?

Policy Recommendations

In the last few years, gains in Community Reinvestment Act lending have
been impressive. Lenders offered an incredible 67% increase in conventional
home purchase loans to African-Americans, a 49% increase to Hispanics, and
a 37% increase to low- and moderate-income households from 1993 to 1996.
While impressive, the gains in community reinvestment lending are fragile.
Even though CRA lending has proven to be profitable, banks and thrifts
could once again neglect disadvantaged communities if HR 10 allows
depository institutions to affiliate with financial companies exempt from
CRA. In order to preserve and build upon the community reinvestment gains
of the last few years, NCRC recommends the following:

Reinvestment Provisions for a Modernization Bill

Expansion of CRA and Consumer Service Obligations

1. CRA must be extended to all affiliates of bank holding companies. (Not
in H.R. 10)

2. CRA must be extended to all operating subsidiaries of federally-insured
financial institutions. (Not in H.R. 10)

3. Bill must extend a CRA-like law to mortgage companies, finance
companies, and credit unions regardless of their affiliation with banks.
(Not in H.R. 10)

4. Bill must extend CRA coverage to the newly allowed Wholesale Financial
Institutions (WFIs). WFI's would not be federally-insured and only accept
deposits of over $100,000. (H.R. 10 extends CRA to WFI's.)

5. Bill should extend a CRA-like law to securities firms, investment
companies, investment advisors, mutual funds, or else develop a new
National Reinvestment Fund that these industries are asked to fund. (Not
H.R. 10)

6. Bill must require "lifeline banking accounts" for all depository
institutions. (Strong provision in Banking Committee bill was diluted in
current version of H.R. 10)

Data Disclosure

7. Bill must extend CRA-like and Home Mortgage Disclosure Act (HMDA)-like
provisions to insurance companies and to insurance activities that will be
newly allowed in bank holding companies. (Not in H.R. 10)

8. Bill must improve upon the small business data reporting recently
required under CRA. Specifically, lenders must be required to report on
the race and gender of the business owner and the sales volume (expressed
in dollars) of the business. In addition, lenders should be required to
report the specific census tracts in which the loans were made in addition
to the current requirement of reporting the income levels of the census
tracts. In addition, denials must be reported as well as approvals. (Not
in H.R. 10)

Regulatory and Structural Issues

9. Bill must require an application process for mergers between depository
institutions and non-banking financial entities, with regulatory approval
based at least partially on the CRA records of the institutions. (H.R. 10
would exempt these mergers from the application process)

10. Bill must prohibit mixing commerce and banking so as to preserve the
safety and soundness of the banking industry and to ensure that minority
and low- and moderate-income communities are served. (The Leach amendment
eliminated commercial baskets in HR 10. The bill's grandfathering clause
is too generous. Holding companies should divest existing commercial
companies sooner than the 10 to 15 year time period allowed by the bill.)

11. Bill must maintain thrift charters and clarify that all activities
undertaken by thrifts are covered by CRA. (H.R. 10 would weaken the thrift
charter. Rep. McCollum (R-FL) unsuccessfully introduced an amendment that
would have abolished the thrift charter.)

12. Bill should establish an advisory council on community revitalization
that would examine the impact of the financial modernization bill on
community reinvestment and issue annual recommendations to Congress for
increasing access to credit and capital for traditionally underserved
populations. (The Banking Committee's bill had this provision; deleted in
current version of H.R 10.)


NCRC's Recommendations for the Merger Application Process

1. Financial institutions must be required to submit a community
reinvestment plan specifying the levels of home, small business, and
community development lending offered to low- and moderate-income
individuals and communities in metropolitan and non-metropolitan areas
after the merger. The plan should also outline investments and services
targeted to the traditionally underserved. A portion of any cost savings
derived from the merger should be devoted to the community reinvestment
plan, rather than solely accruing to the shareholders and senior management
of the lending institutions.

2. Financial institutions should be required to discuss whether they
intend to offer low-cost or no-fee checking and savings accounts, and ATM
services.

3. Financial institutions must be required to disclose proposed branch
closings by neighborhood so that the impact of closings on lower income and
minority neighborhoods can be determined. The Officer of the Comptroller
of the Currency requires a list of branch closings in an application. The
four financial institution regulatory agencies are now considering adopting
a common merger application form that would include mandatory reporting of
branch closures.

4. All of the federal financial institution regulatory agencies must grant
public hearings and extensions of public comment periods at the request of
community groups and other members of the public. Currently, only the
Office of Thrift Supervision has a mandatory requirement of this nature.

5. All of the federal regulatory agencies must conduct analyses on the
level of competition on a city and neighborhood level in addition to their
current multi-county and state level analyses. The recent Federal Reserve
approval order of the First Union-Corestates merger seemed to dismiss
anti-trust analysis conducted for smaller geographical areas although
levels of concentration were much higher in Philadelphia than in the
multi-county area surrounding the city.


NCRC's Recommended GAO Study

1. Examine the historical impact of bank mergers. In particular, the
study must assess the impacts on lending, investments, services, branch
accessibility, and fee levels in lower income and minority neighborhoods
after mergers.

2. Examine the impact of mixing banking and commerce. NCRC believes that
mixing banking and commerce would reduce economic efficiency by distorting
the impartial allocation of credit and would decrease lending to small
businesses in disadvantaged neighborhoods since bank holding companies
would own small firms.

3. The GAO study should assess the progress made by the federal financial
institution regulatory agencies in implementing the recommendations of the
two previous GAO studies on CRA and fair lending (Community Reinvestment
Act: Challenges Remain to Successfully Implement CRA, November 1995, and
Fair Lending: Federal Oversight and Enforcement Improved but Some
Challenges Remain, August 1996). These studies highlighted a lack of
uniformity in examination procedures and quality problems associated with
lending data. The next GAO report should ascertain if the regulatory
agencies have enhanced their capacity to rigorously examine a banking
industry that is becoming increasingly complex and consolidated. If these
issues are not resolved, a situation is created "...in which the
application and enforcement of (fair) lending laws vary by regulator,"
according to the GAO fair lending study.

4. Finally, the GAO study should examine safety and soundness issues
associated with mixing banking, insurance, and securities. Almost two
years ago, the Federal Reserve Board increased the amount of revenues that
could be generated from securities activities from 10 percent to 25 percent
in Section 20 subsidiaries. What has been the safety and soundness impacts
of this change? What would be the impacts of removing these limits
altogether? Of allowing bank operating subsidiaries in addition to
affiliates to perform these activities?









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