Tuesday, July 18, 2000

Fed survey touts reinvestment act

By Marcy Gordon
The Associated Press

        WASHINGTON — The Clinton administration and Democratic lawmakers pointed to a new Federal Reserve report as affirming the value of community lending laws for banks, a longtime topic of partisan wrangling.

        The Fed report sent to Congress on Monday, laced with caveats, indicates that loans made under a 1977 federal law are generally profitable for banks.

        The Treasury Department said the central bank's study confirms that such lending “is profitable and benefits both financial institutions and America's communities.”

        But Senate Banking Committee Chairman Phil Gramm, R-Texas, a critic of the law, said the report shows that loans under the law are “significantly less profitable than ordinary lending.”

        Mr. Gramm said the survey shows that the Community Reinvestment Act, which requires banks to make loans in low-income and minority areas in which they operate, has created riskier loans with lower profits.

        The Fed report says that lending under the law, known as CRA, “can poten tially lead to new and profitable business opportunities for banking institutions.”

        It says “virtually all” of the 143 large U.S. banks and savings associations responding to the survey reported that such lending “has led to new customers and additional loans.” About two-thirds of the responding banks also reported other benefits, such as promoting a positive image in the community.

        The Fed cautioned that its survey had a limited scope and didn't assess the CRA's effect on communities.

        The central bank mailed out questionnaires on Jan. 21 to the 500 largest retail banks and savings associations. Participation was voluntary; 114 banks and 29 thrifts responded.

        The survey reflects the experiences of large banks in a strong economy, and results could be different for smaller banks or under tougher economic conditions, the Fed noted.

        “I approach the report with considerable caution,” said Paul Smith, senior counsel at the American Bankers Association, the industry's biggest trade group. Mr. Smith said many banks have told him they have found making loans under the CRA to be “maybe not quite as profitable as other lending, but it's real close.”

        For the administration and key Democratic constituencies, the community lending law is a cherished icon.

        A partisan dispute over the issue last year threatened to scuttle sweeping legislation to allow banks, securities firms and insurance companies to get into each other's businesses. Key Republican lawmakers reached a compromise with administration officials under which banks wishing to expand into other areas of financial activity have to obtain a satisfactory rating from federal examiners on their community lending and to maintain the rating.


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