Policymakers must find a delicate balance in their move to eradicate mortgage discrimination. History has taught us that well-intentioned government rules can produce results far afield from their laudable original goals.
WHEN PRESIDENT CLINTON ANNOUNCED last summer that he wanted the financial regulatory agencies to work together to reduce the burden of and improve the results from the Community Reinvestment Act (CRA), he indicated to the nation's banks and consumers that CRA could undergo a sea change.
The president wanted to focus on three types of community reinvestment activities--lending to low- and moderate-income individuals, small businesses and farms; investment in low- and moderate-income neighborhoods; and the provision of banking services to low- and moderate-income neighborhoods. His stated desire was to create "more objective, performance-based CRA assessment standards that minimize the compliance burden on financial institutions while stimulating improved CRA performance."
I applaud the president's timely and important initiative and am working with my fellow board members and colleagues at the other agencies to fulfill the vision that President Clinton has articulated. However, I must insert one note of caution. No plan, however well created and executed, can take the place of prudent and consistent reason and judgment in the lending process. Fair lending is not initiated by governmental agencies but by individual lenders across the nation.
From its inception, the Community Reinvestment Act was deliberately vague. Congress wisely chose to avoid even the appearance of prescribing the allocation of credit. CRA, as legislatively defined, required financial institutions to demonstrate that their deposit facilities served the convenience and needs of their communities. The statutory requirements placed on financial institutions included the "continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered." Regulators were required to "encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions."
In recent years, CRA has come under attack for its apparent failure to fully meet its stated objectives. This criticism is not without basis. Inner cities still suffer from disinvestment. Large sections of the population do not have ready access to a bank branch. Statistical studies indicate that racially based differences in mortgage approval rates do exist, even after taking economic variables into consideration.
When all is said and done, however, the question still remains: Will more specific guidance by Congress and/or the regulators, in fact, generate the desired result--equal access to credit for all creditworthy Americans? Before looking forward to see if we can answer that question, let us first look back to the early days of our nation for some possible guidance.
An early CRA lesson
Although we may like to think otherwise, the CRA concept is not a new one. The proper role of banks in their communities has been a controversial subject since the start of our country. In Philadelphia, the Bank of North America was chartered in 1782 by some of our nation's leading citizens including Alexander Hamilton and Benjamin Franklin. The story of their experience is an illustrative one.
The Bank of North America focused primarily on financing commerce through the thriving port of Philadelphia. Pennsylvania's farmers, who dominated the state legislature, thought that the bank was not lending enough to them. They succeeded in their drive to repeal the bank's existing charter and replace it with a much more restrictive one. This proved to be truly a Pyrrhic victory. The bank's fortunes declined, as did banking services. The result was a prolonged slump in economic activity in Pennsylvania, a slump that also hurt the farming community.
I think there are some important lessons to be drawn from this early experience. First, political supervision of bank lending practices is nothing new and may be an inevitable part of a democratic society. That may not comport well with the theoretical model of a completely free financial services industry, but then neither do other aspects of banking, including federal deposit insurance and lending at the discount window. The supervision and regulation function certainly provides a public good, from which banks benefit, by providing reassurance to depositors. For better or worse, political oversight of bank lending practices is an inevitable extension of these other aspects of government regulation of banking.
Political oversight of banking
The second lesson of history is that moving in a purely political direction with banking, or heavy-handed credit allocation, is not only bad for banking, it is harmful to society as a whole. This was of course the historical result in Philadelphia. In more recent times, the effects of misguided credit allocation became evident in the...