U.S. to Push Banks on Credit in Poor Areas

The Clinton Administration, hoping to generate billions of dollars in new loans for small businesses and residents in poor and minority neighborhoods, on Wednesday unveiled proposed new rules requiring banks and thrifts to aggressively seek new customers in all parts of their communities.

Federal regulators will now be much tougher in demanding that financial institutions make credit available to the poor as well as the affluent, said Comptroller of the Currency Eugene A. Ludwig, whose recent travels have taken him from South-Central Los Angeles to a reservation in North Carolina to hear complaints about the lack of credit in low-income areas.

Ludwig told a White House news conference that the proposals “will channel billions of dollars a year in new credit into America’s distressed communities, while at the same time reducing unnecessary burdens on the banks.”

The proposed rules do not need congressional approval and are likely to become effective next spring following a period of public comment. Bankers generally greeted the proposals with restraint while community groups were more enthusiastic.

The rules would make enforcement of the Community Reinvestment Act much more rigorous. The CRA requires that lenders be sensitive to community needs, but it has been ignored for most of its 15-year history, with banks getting a satisfactory rating for submitting a marketing plan even if it produced hardly any loans.

Regulators said they will begin evaluating banks and thrifts according to three tests:

* Lending: Loans should be granted to small businesses, individuals and small, family-owned farms. If a bank has 10% of the Los Angeles market, for example, it should have a roughly comparable share in the city’s poor neighborhoods as well. However, there are no specific tests. “We will not use formulas or quotas or credit allocation,” Ludwig said. “It doesn’t work.”

* Service: Branches should be “accessible to low- and moderate-income areas,” and there should be services, such as low-cost checking, to promote credit availability, according to a statement of goals prepared by Ludwig’s office.

* Investment: Banks should invest in organizations or programs “that foster community development, small and minority-owned business development, or affordable housing lending,” the comptroller’s office said. A bank, for example, might join with a local church to find borrowers and buyers for a new housing development.

Not every financial lender must meet all three tests, regulators said. A savings and loan specializing in home mortgages would not be expected to make business loans. But it might join a cooperative effort by other lenders to help generate business loans for the neighborhood.

The main impact of the new policies will fall on the bigger banks. Those with assets of less than $250 million, representing 75% of the industry but holding just 15% of total industry assets, will be given streamlined examinations under the CRA, something they had long sought.

Only recently have regulators been using the CRA as a threat to reject mergers or new branch applications--and then only in unusual circumstances. Now, Ludwig said, the CRA will be a key part of every bank’s regular examination.

Under the current practice, each lender is given a CRA rating that, if unsatisfactory, makes it hard to receive approval to acquire another bank or open new branches. But, under the new proposals, federal regulators would be prepared to use cease-and-desist orders or impose stiff penalties to force lenders to change their behavior, he said.

“The only thing that ought to matter on a loan application is whether you can pay it back, not where you live,” Treasury Secretary Lloyd Bensten told the news conference.

Joining Bentsen and Ludwig at the White House news conference were representatives of the Federal Reserve Board, the Federal Deposit Insurance Corp., and the Office of Thrift Supervision.

Community groups said they look forward to expanded borrowing prospects. Robert Gnaizda, general counsel of the Greenlining Coalition, based in San Francisco, said the best feature of the regulations is the emphasis on performance rather than flashy marketing campaigns.

“With the exception of Bank of America, every bank in California will be affected adversely if they continue with their 1992 level of (low-income and minority loan) performances,” he said. “They will have difficulty getting a satisfactory CRA rating under the new rules.”

The new CRA regulations are “positive if the reform will produce results in terms of real loans on the street,” said Lori Gay, president of Los Angeles Neighborhood Housing Services, a nonprofit housing developer. “We’re all for that--less paperwork and more product. That’s the goal,” she said. Current CRA rules, she added, tend to “reward paperwork and phone calls.”

Bankers greeted the proposals with more restraint.

“The details of the plan will need analysis, but it looks like this proposal could finally put substance over form,” said Daniel R. Smith, president of the American Bankers Assn. “Bankers wanted to get away from the one-size-fits-all approach that was burying banks, especially community banks, in paperwork. . . . “

“We’re encouraged that it includes a number of items we suggested,” said Brian Smith, director of the Savings and Community Bankers of America.

Rosenblatt reported from Washington and Kraul from San Diego.