U.S. to Toughen Business Loan Fairness Rules

In a move designed to spur lending to minority groups and residents of low-income neighborhoods, the federal government is expected to announce new regulations today that will require banks and thrifts to collect and publicize detailed reports on business lending by neighborhoods.

Regulators will use the data, being assembled for the first time under government supervision, to decide whether financial institutions are serving all segments of the community in their business lending.

Though no formal quota or targets will be set, regulators may use the data to pressure lenders to make additional business loans in neighborhoods that they believe are being ignored. And they will use the lending performance as an important standard in deciding whether to approve bank applications for mergers, acquisitions and new branches.

Robert Gnaizda, executive director of the Greenlining Coalition, a San Francisco-based consumer group active on bank lending issues, predicted the new regulations could triple lending to minority-owned businesses located in low-income areas during the next five years.

“This will make a very positive impact,” Gnaizda said in a telephone interview. “Now the regulators are showing they care how many loans you make. It is no longer enough to visit with community groups and take them to lunch.”

Regulators and community advocates are hopeful that the new rules will have the same positive impact on business lending that previous regulations have had on home mortgage loans. Disclosure rules for home mortgage applications collect information by sex, race and ethnicity.

In a concession to bankers and their Republican supporters in Congress, the regulators decided against using the same type of report for business lending. Instead, however, they will gather information by census tracts, and that will allow them to measure with considerable precision the degree of lending activity in poor and minority neighborhoods, Gnaizda said.

The federal Community Reinvestment Act says banks and thrifts must serve all segments of their communities, including the poor and minorities. Despite successes in the mortgage area, many members of Congress and the public felt there has been a notable lack of fairness in business lending.

CRA efforts too often were focused on “process rather than performance,” according to the regulations to be published today after their formal approval by the Federal Reserve Board. A copy was made available to The Times.

Traditionally, lenders often argued successfully that their outreach efforts were sufficient if they took such steps as visiting community centers, holding seminars, taking out advertisements in minority-owned newspapers or--in at least one case--sponsoring Boy Scout troops.

The new standard will consider the number of loans made as a part of the annual CRA review as well as on any applications to merge or expand.

“Under the new CRA rules, banks and thrifts will be evaluated based on actual performance--loans made, services provided and investments in their communities,” according to a fact sheet prepared by federal regulators.

“The emphasis on actual performance responds to the nearly universal criticism that current CRA examinations rely too heavily on documentation of an institution’s policies, procedures and community contacts rather than lending,” according to the new regulations, which will take effect on July 1.

Each bank and thrift will be required to file annual reports for census tracts showing loans in categories up to $100,000, between $100,000 and $250,000, and more than $250,000. Also recorded will be the number of loans to companies with less than $1 million in annual revenue.

Joining the Fed in adopting the regulations are the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision.

The rules, although not as sweeping as those sought by some community groups, represent a major change in regulatory policy and a victory by Comptroller of the Currency Eugene Ludwig, a strong advocate of tougher CRA policies. It was a concession by the Federal Reserve, which had been strongly opposed to the collection of racial and ethnic data on business loan activity.