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Oct. 20, 2004

'Redlining' rules may be weakened

Law requires lenders to show they serve poor neighborhoods

David W. Chen, New York Times

Federal banking regulators in the Bush administration are poised to weaken the nation's primary law requiring small banks to serve low-income residents in their own back yards through housing investments and development projects.

Since 1977, the Community Reinvestment Act has required banks with assets of more than $250 million to satisfy stringent tests gauging their banking services to low- and moderate-income residents. Because of that obligation, housing groups say, banks have channeled $1.5 trillion into housing, medical clinics and other projects. But many small banks have also complained about being sapped by the resources needed to comply.

So in recent months, two of the nation's four bank regulators -- the Office of Thrift Supervision and the Federal Deposit Insurance Corp. -- have proposed reducing the number of banks subject to the law. Under the proposal, only banks with at least $1 billion in assets would have to comply, meaning that 1,100 smaller banks would be subject to less scrutiny. The thrift office has already put its proposal into effect; the FDIC is a few months away from acting, although today is the deadline for public comment on the plan.

The two other bank regulators -- the Office of the Comptroller of the Currency and the Federal Reserve Board -- appear inclined to loosen their rules as well.

The law's detractors say that it has forced small banks to struggle to stay afloat, putting them at a competitive disadvantage with large banks that were more adept at complying with the law.

While the law may have initially been a response to redlining -- where banks withhold home-loans from neighborhoods considered poor investment risks -- critics say the law has become irrelevant because small banks recognize that community reinvestment is critical for their survival.

"Community banks are an endangered species, and they are drowning in a sea of regulation," said Rep. Jeb Hensarling, R-Texas, who sponsored a bill in Congress this year to raise the threshold to $1 billion. "I'm not completely certain what purpose CRA serves, period."

But many Democrats, larger banks and rural organizations say the Community Reinvestment Act has arguably been the nation's most significant community revitalization initiative.

Before the law, many banks engaged in discriminatory redlining practices by choosing not to make mortgage and business loans to people in poor and predominantly minority neighborhoods.

After the law, banks were held accountable to a higher and tougher standard, forcing them to actively pursue lending, investment and other activities in poor areas.

Among the biggest critics of the changes are the National Community Reinvestment Coalition, a nonprofit organization that tries to improve credit access for underserved communities, and the National Association of Affordable Housing Lenders, a coalition of banks, insurance companies, developers and pension funds.

The National Association of Home Builders, which has generally been viewed as an ally of Republicans, says that the proposal could adversely affect rural areas, said Bobby Rayburn, the group's president, a builder in Jackson, Miss.

FDIC officials say that they are taking such comments to heart. Indeed, in a speech to the American Bankers Association in New York this month, Donald Powell, chairman of the FDIC, said that he had not made up his mind about the proposal, adding that "I do not want to do anything that will hurt our nation's communities by impairing the flow of credit to the underserved or otherwise undermining CRA objectives."

Even so, many bankers and housing groups believe that the FDIC will ultimately approve its proposal. Many also believe that the other regulators will follow suit.