Madam chairwomen and members of the subcommittee:
The Community Reinvestment Act should be repealed--not reformedor restricted but repealed! For no conceivable set of regulationson a bank is consistent with the objective of the Act to meet "thecredit needs of its entire community, including low- andmoderate-income neighborhoods, consistent with safe and soundoperation of such institution."
In general, current regulations require banks to demonstratethat they are reaching out to all segments of the local creditmarket in a safe and sound manner. The criteria for a satisfactoryrating are subjective and somewhat arbitrary but, as a rule,compliance is not extraordinarily burdensome. The primary effect ofthe current regulations is to increase the cost of operation,especially for small banks and in low income areas, without anysignificant effect on the allocation of new credit.
So far, banks have not been required to meet objective targetsfor loans in specific neighborhoods or to specific groups. Theregulations proposed in December 1993, however, would haveestablished a standard that small banks make loans in a communityat least equal to 60 percent of the deposits from thatcommunity.
There were several serious problems with is proposedregulation:
- The CRA does not provide statutory authority for aloan-to-deposit test.
- For a given supply of deposits, this regulation would havereallocated loans from communities with a high demand for loans tocommunities with a lower demand-- misallocating credit over spaceand reducing the safety of the banking system.
- The more likely consequence of this regulation is that bankswould have run off deposits in areas of low loan demand, probablyby reducing deposit rates or closing branches--an unintended effectthat is wholly contrary to the objective of the CRA.
Fortunately, after 6,700 mostly negative comments, theregulations proposed in December 1993 were withdrawn.
Unfortunately, the regulations proposed in September 1994 areeven worse. Let me count the ways:
- The "assessment context" provision would create the frameworkfor pervasive credit allocation to politically favored groups. Theregulatory agencies would evaluate a bank's CRA performance interms of a regulator's perception of the overall credit and serviceneeds of a community and the performance of other lenders. The 60percent loan-to-deposit ratio has been dropped, but the regulatorswould have the authority to set a higher ratio in specific cases.This provision would be the genesis of massive micromanagement bythe regulators and massive paperwork by the banks.
- The proposed regulation would override any concern about banksoundness. The regulations proposed in December 1993 had includedstatements that banks are not expected to make loans that areexpected to result in losses, to expand their branching network, orto operate facilities at a loss. These protections are not includedin the proposed new regulations.
- Banks should not be required to collect data on the race andgender of the owners of small firms that make loan applications.The CRA does not provide authority for any regulatory decisionsbased on such data, and the potential use of these data is notdefined in the proposed regulations. The potential for abuse in theuse of these data is also substantial.
The above comparisons should be sufficient to illustrate why theCommunity Reinvestment Act should be repealed. Current regulationsare only moderately costly but are otherwise innocuous. Theproposed new regulations would be very costly to the economy, tothe banking system, and to the communities they serve. Congressshould be most critical of proposals to use regulatory powers toreallocate credit, either across neighborhoods or among groups. Theprimary long term effect of such measures would be to furthercontract the banking system, increasing the number of neighborhoodsdependent on check cashing outlets and pawnshops.
The Community Reinvestment Act was the wrong solution to agenuine problem, for the most part created by other governmentregulations. Until recently, federal restrictions on interstatebanking and state restrictions on intrastate branching severelyrestricted bank competition in local markets and the potential forgeographic diversity of loan portfolios. These restrictions havebeen substantially reduced, promising a more competitive bankingsystem that is more responsive to the interests of both depositorsand borrowers and less vulnerable to adverse economic conditions inspecific regions. Another effect of considerable importance:competition among banks is also the best discipline ondiscrimination among loan applicants on any basis other than creditrisk.
Don't try to fix the Community Reinvestment Act. It can't bedone. Repeal it.