Bush Edict Lets Banks Off the Hook

Endangering Community Development

Published: NYT, August 21, 2004

The Bush administration, which has already hobbled programs that provide housing subsidies for the poor, is undermining the Community Reinvestment Act, the most successful community revitalization program in the nation’s history. The act requires banks to lend, invest and provide banking services to poor communities. So far, it has made more than $1.5 trillion available, much of it to developers and nonprofit groups that build affordable housing for the elderly and disabled people, as well as to medical clinics and other projects that would never get built if they were left to the private sector.

Thoughtful critics in the banking community have a point when they argue that the program needs updating and simplification, so that investments are targeted more effectively and banks have less difficulty complying with the act. But two of the federal agencies that oversee the banking industry have proposed a drastic change that could allow more than a thousand banks to back away from their community development obligations, leaving consumers in many states with worse banking services, and the communities themselves devoid of badly needed development projects.

The proposals are aimed at reducing the regulation of smaller banks, which have always thought that the return on community investments is too small and that the administrative costs of complying with the act are too high. The current law requires large banks to be evaluated on what is commonly known as the “three-part test”: how they lend, invest and provide services in their communities. Small banks – those with assets of $250 million or less – are evaluated on a less stringent basis. But under new rules promulgated by the Office of Thrift Supervision, which oversees savings and loan associations, those more relaxed standards would apply to S.& L.’s with assets up to $1 billion.

The Federal Deposit Insurance Corporation, which oversees thousands of banks, is proposing the same adjustment. The government should update the regulations to make it simpler for banks to comply. Nobody likes red tape. But the Bush administration has a way of presenting a major policy change as a minor effort to tidy up cumbersome rules. Banks should not be allowed to jettison community reinvestment responsibilities – which occupy a tiny fraction of banking assets – in the quest for profit. If these new regulations are allowed to stand, the loss of C.R.A.-driven investments could be significant in some states, like Alabama, Florida, Idaho and New Hampshire. Communities could eventually find themselves back in the dark ages of redlining and financial isolation.