By Eugene T. Lowe

On July 1, the House of Representatives passed H.R. 10, the Financial Services Act of 1999 by a vote of 343-86. Although the House bill is not as damaging to the Community Reinvestment Act (CRA) as the Senate passed bill, S. 900, it still weakens CRA. It had been expected that an amendment would be offered on the house floor to strengthened CRA, as the Conference of Mayors had called for in a letter to all house members. But the House Rules Committee did not allow any CRA-related amendments to be offered.

In general, H.R. 10, creates a two-tiered banking and lending industry of which one part is covered by CRA, while the other part is not. With the two-tiered structure, financial institutions will be able to avoid CRA community obligations. In the letter to house members, mayors said: "H.R. 10 does not require securities companies, insurance companies, real estate companies and commercial and industrial affiliates engaging in lending or offering banking products to meet the credit, investment and consumer needs of the local communities they serve.

"The exclusion of nonbank affiliates" banking and lending products from the CRA is significant because increasingly, businesses such as car makers and credit card companies, securities firms and insurers are behaving like banks by offering products such as FDIC-insured depository services, consumer loans, debit and commercial loans. Additionally, private investment capital is decreasingly covered by CRA requirements, making it more difficult for underserved rural and urban communities to access badly-needed capital for housing, economic development and infrastructure.

"Currently, more than two-thirds of long-term savings and investments now reside in nonbank intermediaries, compared to less than one-third in the mid 1970s. The functional effect of this market shift is that merely one-third of capital investment in the United States is conducted according to principles embodied by the CRA. Unless financial modernization applies the CRA to nonbank affiliates’ banking and lending activities, this trend will increase, thereby fundamentally weakening the CRA."

The Senate bill passed before the House is far worse with its anti-CRA provisions. Banks seeking to affiliate with securities and insurance firms would not be required to have a satisfactory CRA rating; banks with a "satisfactory" or better CRA rating would be provided a "safe harbor" from public comment on CRA performance; small banks in rural areas (less than $100 million in assets) would be exempted from CRA obligations.

The next step, of course, is a house/senate conference on H.R. 10 and S. 900. The President has said that he will veto a bill that weakens CRA.