NCPA - National Center for Policy Analysis

Critics Say Banking Law Leads To Extortion

July 27, 1999

In 1977 Congress passed the Community Reinvestment Act, which requires banks to channel capital to depressed communities. It was supposed to combat so-called "red-lining" -- the reluctance of lenders to extend credit to lower-income minority neighborhoods.

In the act's first 16 years on the books, its impact was modest. But after 1992, regulators stepped up enforcement and activist community groups have used the act to put pressure on banks -- a process Senate Banking Committee Chairman Phil Gramm (R-Texas) calls "extortion."

The groups can protest when banks want to merge, open new branches or go public. Since banking regulators can take a bank's CRA record into account in determining whether to grant regulatory approval for such moves, activists can prod banks into making loans they might not make otherwise -- under threat of protesting regulatory approval.

  • From 1977 through 1992, a total of $42 billion in lending and investment pledges was made under the Community Reinvestment Act.
  • But in the six years beginning in 1993, about $1 trillion in private loans and investment commitments was channeled to lower-income homeowners and small businesses -- nearly 25 times the amount committed during the act's first 16 years.
  • In 1998 alone, loans and investments made by banks under CRA totaled $696.3 billion.
  • Bankers were coaxed into lending for such projects as rehabilitation of 633 abandoned homes in Brooklyn's Bedford-Stuyvesant district, loans to Cheyenne tribes in Montana and creation of a shelter for battered women and children in San Diego.

Such deals irk Sen. Gramm and he has proposed remedies which would remove some of the leverage CRA gives community activists.

Source: Jacob M. Schlesinger and Michael Schroeder, "Law Requiring Banks to Aid the Poor Is Under Attack," Wall Street Journal, July 27, 1999.

 

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