Helping L.A. Without Breaking the Bank : Federal Reserve must do more to reassure lenders
If the nation’s lenders had taken just a fraction of the millions they squandered on bad loans to real estate speculators and leveraged buyouts in the 1980s and instead had invested the money in urban America, cities might be better off today.
That thought weighs heavily on the conscience of more than a few California bankers, now trying to find ways to lend money to riot-torn areas of Los Angeles. A number of banks have earmarked considerable sums for rebuilding. But federal regulators could significantly encourage even more loan activity if unambiguous guidelines were issued to clarify how far banks can go beyond normal restrictions on loans to accommodate special borrowing needs.
On Tuesday, federal bank regulators issued a joint statement that meant well. It told banks and thrifts that if they restructure loans or extend repayment terms for borrowers hurt by the Los Angeles riots they would not be penalized by bank examiners-- if such adjustments were “carried out in a prudent manner.” Right idea, but too vague: Banks and thrifts need better definitions to guide their handling of loans.
“Prudence” to a banker might be risky to a bank examiner, whose job it is to determine when a bank steps across the line. Thurman Smith, a Bank of America vice president, says that in providing the $25 million that B of A has promised to help rebuild 500 to 750 small inner-city businesses, the bank is going to stretch its own rules. “This is as close to character lending as you’re ever going to see,” he says. “This is not a typical loan.”
That’s a commendable stance, but under existing rules the government could second-guess B of A and other lenders. A bank examiner could consider such loans terribly risky and could regard deferring loan payments for riot victims as irresponsible. If so, lenders would have to label such loans as problem accounts--an action that typically requires them to set aside more hard cash to cover their exposure. That could mean losses for some lenders, especially for small banks, and could freeze available loan money.
Lack of access to credit has been a major obstacle to minority and low-income communities. A recent study of home mortgages showed that black and Latino applicants were denied loans twice as often as whites with similar incomes. Asians fared a little better than blacks and Latinos.
Another survey has revealed that Los Angeles area banks made up nearly 20% of banks nationwide rated as “substantially” in violation of meeting credit needs of minority and low-income customers as required by the 1977 Community Reinvestment Act. Another study showed that South-Central Los Angeles, home to half a million people, has only 19 bank branches.
This dismal pattern of lending prompted Lawrence B. Lindsey, a governor of the Federal Reserve Board, to warn banks that they could face stricter regulation if they fail to broaden their lending policies. To encourage banks, the Fed is now allowing California banks to meet low-income lending requirements by investing in Los Angeles, even if the banks are situated outside the areas of heavy riot damage. The Fed also is seeking to allow state member banks, for the first time, to be actual investors in community development projects and corporations.
Now banking authorities must go one step further to provide explicit, clear, non-hedged guidelines to banks. That would give a positive signal to reinvest in cities.
