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No free market


IF THE Republicans believe that people ought to be able to make it on their own, why are they proposing to destroy a program that, at practically no cost to the government, gives everyone a fair chance to participate in the capitalist system?

The Community Reinvestment Act was adopted in 1977 to underscore what U.S. banking laws have traditionally held -- that financial institutions granted unique privileges by the government have an obligation to serve their communities, including low- and moderate-income areas. After all, these chartered institutions are entrusted with people's money. The deposits they take (and make money on) are publicly insured for up to $100,000. And fairly recently, hundreds of billions in public funds went to bail out the savings and loan industry from its investments in highly risky ventures, many of them far from their home communities.

Bank credit is an important key to success in our economy. Entrepreneurs don't normally build corporations with their own cash; they borrow from banks and investors. Equally rare is the family that can purchase a home out of pocket.

As a result of the CRA's gentle persuasion, banks and thrifts have learned that people living in inner-city neighborhoods and poor rural areas can be good credit risks. The CRA has enabled lower-income people to buy homes and start businesses -- the usual paths to asset accumulation, higher education and higher living standards for families.

Despite the CRA's success, Republicans in the House and Senate have introduced legislation that would effectively remove the CRA's fair lending incentives for all but a fraction of the nation's financial institutions.

The CRA encourages banks to accept and approve loan applications from credit-worthy people even if they live in less-than-prosperous neighborhoods. It provides an incentive for banks to maintain branches in these areas and to market to people who have little experience with finance.

The CRA doesn't require banks to make certain types of loans or to apportion credit to particular groups. It's more a carrot than a stick. It merely puts financial institutions on notice that their community reinvestment efforts will be considered when they seek federal approval of mergers, acquisitions and other profitable business expansions.

In the 18 years the CRA has existed, financial institutions have channelled more than $60 billion into low- and moderate-income areas. And the annual pace is picking up. Federal Reserve Governor Lawrence Lindsey has said, "CRA successfully delivers billion to $6 billion a year to low-income areas without employing a large bureaucracy."

First National Bank of Chicago, which 10 years ago pledged to loan $25 million in poorer neighborhoods, recently announced a CRA goal of $2 billion by the end of the decade. Mary Decker, First Chicago's senior vice president for community relations says, "It is astounding to me to think that these loans would be made without the CRA."

The CRA has led some lenders to consider utility and rent payments as evidence of credit history for people who lack credit cards or a car loan. Some underwriters now allow income from seasonal or part-time work as substitutes for income from uninterrupted, full-time employment. By using appraisers familiar with inner-city neighborhoods, lenders have also learned that properties in "bad" neighborhoods can satisfy their collateral requirements.

Last year, the Wall Street Journal reported how flexible lending policies helped one woman buy a house in an inner-city neighborhood. After completing a financial counseling program sponsored by the bank, she improved her credit record and qualified for a mortgage from Mellon PSFS. Not only did she get the house of her dreams in North Philadelphia, but also her monthly mortgage payment was only $319, compared with her $425 in rent. "The banks are learning that they can make a profit on such lending," the Journal concluded.

So, just when Republicans are cutting subsidized housing, why are they dismantling an incentive that helps at least some of the poor lift their families out of poverty?

They say they only want to eliminate paperwork for overburdened bankers. But can you think of a more computerized industry than banking? Wouldn't any company want to know where its customers live and their demographics? This is the kind of data the CRA requires, and the Clinton administration has already streamlined the CRA evaluation process, particularly for the small banks Republicans say they want to help.

No, it seems more reasonable to conclude that the legislation's sponsors just want to keep capital out of the hands of those who don't now have access to it. Leave it to the Republicans to advertise a free market with locked doors.

Susan Rees directs the BankRight project of McAuley Institute in Silver Spring. The project works to promote community reinvestment.

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