NATIONAL COMMUNITY REINVESTMENT COALITION

NCRC Strategic Overview and Status of Financial Modernization Legislation
The drive to pass financial modernization legislation has created opportunity and risk for the community reinvestment movement. Because of the scope and controversial nature of the legislation, we have more opportunity than we normally would to expand community reinvestment type laws at the national level. On the other hand our efforts are certain to meet resistance and a potential backlash from legislators who are in a deregulation frame of mind. When NCRC's staff, board and Legislative/ Regulatory committee began to develop a plan to inject the expansion of CRA into the "financial modernization" effort back in 1997, we were warned by some of the "old hands" on Congressional committees that an expansion effort would be met with reaction. We acknowledged that risk, but we also understood the risk of simply holding firm on current CRA law while the financial services industry was "modernized" in a way that would make CRA increasingly irrelevant for low and moderate income communities. Because of the vast consolidation of financial service industries that the repeal of Glass-Steagall legislation would bring to our communities, we did not buy the idea that there could be a "CRA-neutral" financial modernization bill.

The financial industry has long wanted to repeal the depression era Glass-Steagall law which erected a wall (although lately somewhat porous) between banking and the rest of the financial services sector. However each attempt during the past decades has failed because of tactical and parochial differences among the banking, insurance, and securities lobbies. For instance the insurance companies want to maintain the state regulation of their industry while bankers developing their insurance businesses would prefer to be regulated at the national level. Dozens of differences of this sort have kept financial modernization very controversial until the financial lobbies began intensive negotiating sessions the second half of this year.

In the past the House of Representatives has been less inclined to pass financial modernization than the Senate, so when the House passed HR 10 by a vote of 214-213 on May 10, the backers of financial modernization saw a golden opportunity. They pushed a more banker friendly version of KR 10 through the Senate Banking Committee, with the unanimous support of the Democrats on the committee. They would likely have gotten the bill through the entire Senate were it not for the determined opposition to the bill by Senators Gramm and Shelby. Ironically these Senators' stated reason for opposing the bill were the minimal CRA provisions in the bill. There has been intense speculation on Gramm's true motivation for opposing the bill. Some observers believe that Gramm hopes that if D'Amato is defeated this year, Gramm will become Banking Committee chair and will be able to create a financial modernization bill more to his liking. Others believe that Gramm simply has a visceral hatred for community reinvestment laws and intends to launch a full assault on CRA in 1999. In addition, it should be noted that the Texas bankers association is one of the few bankers' groups that do not like the bill, perhaps because Texas still has a number of smaller banks.

Whatever the outcome of the 1998 elections, it is clear that NCRC members will continue to be faced with the prospects of a financial modernization bill in 1999. Already Congressman Leach, Chair of the House Banking Committee has reintroduced a modified version of HR 10 as HR 4870. His stated intention is to have a version of financial modernization similar to that which faced the Senate ready for immediate consideration by the House Banking Committee in 1999.

NCRC's Position

NCRC has taken the position that financial modernization legislation will do enormous harm to low and moderate income urban and rural communities in at least four distinct ways:

1. Financial modernization will cause asset shifting from CRA-covered affiliates to non-covered affiliates.

2. Financial modernization will decrease regulatory review of mergers

3. Financial modernization imperils the safety and soundness of the banking system

4. Financial modernization will accelerate the trend for low and moderate income consumers to find their banking services outside of depository institutions.

Asset Shifting

Financial modernization will accelerate the asset shifting that has been occurring over the last several years. An increasing amount of mortgage lending is now being conducted by mortgage company affiliates and subsidiaries of banks that are outside direct CRA oversight. In many cases this lending by affiliates is raising serious fair lending questions. For example, banks currently have affiliated subprime lenders who often target low and moderate income and minority neighborhoods, creating a sophisticated form of redlining based on price rather than access. Few of these institutions have policies in place to refer credit worthy customers from these neighborhoods up to their prime lenders. These affiliates are not covered by CRA under current law. For those that are affiliates of bank holding companies, the Federal Reserve has been blatant in its refusal to do fair lending reviews of these affiliates.

If a financial modernization bill passes there will be nothing to prevent a "qualified financial holding company" (whether created from a banking, insurance or securities base) from maintaining a small depository banking presense but doing the bulk of its lending from non-depository affiliates of the holding company. In order for CRA to adequatley regulate this structure, a financial modernization bill should require that all lending done by financial holding companies, whether in affiliates, subsidiaries or depository institutions, is subject to CRA evaluations and regular fair lending reviews.

A more aggressive expansion of CRA would explicitly extend CRA to all affiliates and subsidiaries of banks including insurance firms and securities companies. This would prevent a shrinkage of CRA coverage due to asset shifting from lending institutions to the securities and insurance parts of the financial holding company.

Decreased Regulatory Reviews of Merger Applications

The trend towards less intense merger reviews which started with the amendment of Federal Reserve's Regulation Y and the OCC's Part 5 would become even more problematic with the passage of a financial modernization bill. While the regulatory reviews involving mergers of depository institutions would not be affected directly by a law like HR 10, the mergers of banking institutions and non-depository institutions would become much looser. In the version of HR 10 which was being presented to the Senate this year, only the mergers of banks and non-depository financial companies with Combined assets larger than $40 billion would require regulatory approval. This means there would be no opportunity for public comment and input from the communities affected during the mergers of small and medium-sized institutions (which are most of the financial concerns in the country). The public comment period has historically been the time period during which lenders and community groups have signed CRA agreements. In addition to not reviewing the CRA performance of banks involved in these mergers, the regulatory agencies would likewise not be reviewing the safety and soundness of the merging institutions.

Safety and Soundness Problems

HR 10 as it was written would have allowed unlimited affiliations between insurance companies, securities firms and banks that met the conditions required for being a "Qualified Financial Holding Company." This would dramatically reduce current protections which place strict limits on the extent of cross ownership between banks and more speculative activities. A bank which buys a large insurance company under the new law, for instance, could come under enormous financial pressure following a totally unpredictable natural disaster. There would be no provisions for preventing or limiting bank ownership of hedge funds or similar speculative venture.

Lifeline Banking Issues

Congresswoman Marine Waters (D-CA) was able to add a lifeline banking provision to the version of HR 10 which passed the House Banking Committee this year. The Senate Banking Committee, however, deleted this provision. As banks have become bigger by merging they have generally increased their fees. The consolidation that HR 10 will unleash is likely to result in a quantum leap in fees that will make access to financial services even more difficult for low and moderate income people. Simultaneously the government, through its EFT '99 program is encouraging recipients of government benefits to begin receiving their benefits electronically. Attempting to get more of the "unbanked" into the banking mainstream only makes sense if low income consumers have access to free or very low cost accounts.

Requirements for "Community Friendly" Financial Modernization Legislation

Because of serious harm unbridled financial modernization will do to low and moderate income communities, NCRC has taken the position that we can only support financial modernization legislation if it improves access to credit, capital and financial services for low and moderate income communities. This legislation presents an opportunity for our friends on Capitol Hill and in the Administration to push for the extension of CRA-like and HMDA-like laws to the insurance industry and other financial services providers. The significant expansion of community reinvestment ought to be the price that members of Congress who believe in the Community Reinvestment Act extract for their support of any financial modernization legislation.

Some members of Congress understand this, but unfortunately we still have not convinced enough of our friends to take this position. In the markup of HR 10 in the House Banking Committee, Congressman Joseph Kennedy (D-MA) attempted to add an amendment that would have required the collection of HMDA-like information for any insurance affiliates of bank holding companies. That amendment lost by only one vote in committee. With excellent support from the Treasury Department and Congressman Leach (R-IA), friends of CRA were able to pass H.R. 10 with the newly allowed Wholesale Financial Institutions (WFIs) covered by CRA. Congresswoman Waters was able to attach strong "lifeline banking" provisions to an early version of HR. 10.

However this bill has never dealt with the lack of clearly defined CRA coverage for the affiliates of bank holding companies that engage in lending activities. Representatives Luis Gutierrez (D-IL) and 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. (The current version of HR 10 has an anemic requirement that depository institutions of holding companies must have a Satisfactory and above rating in order to engage in financial activities authorized by the bill. More than 98 percent of all depository institutions have Satisfactory and Outstanding ratings. HR 10 also has a 24 month grace period to bring a failing CRA grade up.)

Representative Kennedy introduced an amendment that would have required securities affiliates of holding companies to demonstrate that their branch distribution network did not arbitrarily exclude low- and moderate-income communities. In addition, Representative 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. While these were valiant attempts to amend bad legislation, these amendments were unable to gather enough votes to pass.

In addition all mergers must be subjected to an application requirement and review process by appropriate regulatory agencies. Anti-trust analysis, safety and soundness analysis, and CRA reviews should be made more rigorous -- not less. Some limits on cross-ownership among insurance, securities, and banks should remain for safety and soundness reasons. Currently, Section 20 subsidiaries of banks can only earn up to 20 percent of their revenues from securities activities. Banks can only sell insurance, and not underwrite it currently.

Strategies For Accomplishing "Community Friendly" Legislation

During the next Congress this bill will again have to be considered by the House Banking Committee, the House Commerce Committee and the Senate Banking Committee. During the period between now and the start of the new legislative year, we must focus on changing the minds of enough members of those committees about the importance of including community reinvestment provision in any bill that is to be considered. The House Banking Committee is most attuned to some of the issues that we are raising.