Financial Services Reform Is Long Overdue

The Financial Services Modernization Act of 1999 is a mouthful of a title for legislation that is actually designed to make things simpler for anyone who has a checking account, car insurance or a share of stock. Many people have all three, and that’s why this bill is so important.

The bill will formally remove the walls that have separated banking from insurance and securities since the Great Depression. The separation may have made sense at one time, but its usefulness has passed due to dramatic changes in the marketplace and improvements in the safety and soundness of these industries.

Federal officials have recognized this and, through creative regulation, now allow securities firms to act like banks, and bankers to sell insurance. As a result, the walls erected to separate these industries now look more like slices of Swiss cheese.

The Financial Services Modernization Act will accomplish in a rational, orderly way what regulators have been attempting to do on a case-by-case basis. It sets out a legal framework for how the banking, insurance and securities industries will compete and, more important, how they will better serve their customers.

That’s the whole purpose of financial services modernization: to make financial services more accessible to people at a more affordable price.

But for some reason, people are getting distracted by the claim that this bill would do violence to or even abolish the Community Reinvestment Act. Certainly, those who do not want to reform the CRA want you to believe the bill “destroys” the CRA.

First of all, the Community Reinvestment Act was written in 1977 as a way to encourage a bank to offer loans in the bank’s service area. It has grown to a behemoth that has spawned a virtual CRA industry in which self-styled community groups use the law to generate salaries and consulting fees for themselves. By their own admission, these groups have collected more than $9.5 billion in cash from banks over the life of the CRA, most of it within the last 10 years.

For now, the Senate has approved three small changes to the CRA as part of financial services modernization. These changes will bring integrity, relevance and accountability to the CRA process.

First, the bill would make sure that the CRA ratings mean something. Every year, banks are rated for their compliance with the CRA, and those ratings should be a factor when regulators are considering applications for new branches or mergers.

The legislation says that a bank that has three consecutive years of satisfactory the CRA ratings should be presumed to be in compliance with the CRA when it proposes a merger or a new branch. Anybody who wants to say otherwise will have every opportunity to make a case, but before the bank’s application can be delayed or denied, the complainant must present some evidence to back up the complaint.

This provision constitutes a direct threat to CRA protesters who file or threaten to file frivolous complaints against pending mergers as a means of shaking down the bank and demanding cash payoffs to drop their complaints and go away. This bill simply requires these protesters to back up their allegations with some proof.

The second CRA provision would lift CRA mandates from small, rural financial institutions. The Federal Reserve says this provision will affect 38% of the nation’s banks, but their assets add up to only 2.7% of the total. These are truly the smallest of our financial institutions, the ones least able to afford the time and paperwork of a government mandate like the CRA. And in 16,380 CRA audits over the last nine years, only three of these small, rural banks have been found to be substantially out of compliance. This is one of the greatest regulatory overkills now in existence.

Finally, a bipartisan amendment to the financial services legislation was added in a unanimous vote on the Senate floor to require public disclosure of all CRA-related agreements between banks and community groups. Bank customers and CRA loan recipients have a right to know the terms of agreements that routinely pay cash or give a percentage of the face value of loans to third parties. Only with these facts can banks and community groups be held accountable.