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Agreement Reached on Community Reinvestment Act

By Eugene T. Lowe

On Friday, October 22, following a long negotiating session that stretched into the early morning hours, Secretary of Treasury Lawrence Summers, Senator Phil Gramm (TX), Representative Jim Leach (IA), head of the National Economic Council Gene Sperling and several others reached agreement on the financial modernization legislation that included the Community Reinvestment Act (CRA). Proponents of the CRA are at best reluctantly accepting the deal that was struck between the White House and Senator Gramm, who as Chairman of the Senate Banking Committee, had proposed in the bill that he authored, S. 900, several anti-CRA provisions.

To be sure, as of this writing, it is still not clearly known just what the final conference report will contained. During the negotiating session, verbal agreement was reached on many issues, but not much was actually written down. Hence on Monday morning, October 25, as the negotiators went back to work to clear things up, no one could state exactly what was in the final agreement.

In general, however, some of the anti-CRA provisions appear not to have made it into the final bill. The absolute exemption of all banks with less than $250 million in assets was modified. Based on their last CRA rating, these banks would be examined every 4 years if they are satisfactory and every 5 years if they are outstanding. The safe harbor provision was also dropped. This provision would have allowed a bank to expand, acquire or merge with insurance and securities if its last CRA rating was satisfactory or better thereby weakening any comments that would have been offered by community groups.

A sunshine provision was approved that requires community groups and banks to make annual reports on their CRA agreements. The community group can fulfill the reporting requirement by “filing with the bank, and the bank will then pass this information on to the regulator”, according to a draft statement of the Treasury Department.

Wholesale financial institutions or “woofies” are created by the bill. Not federally insured and therefore not heavily regulated as regular banks, these entities would require a minimum of $100,000 and would not be covered by the CRA.

Overall, the financial modernization bill is historic, breaking down the walls between banks, insurance companies and securities firms that was put in place by the Glass-Steagall Act of 1933. With the bill, a single company can now have its own banking, securities, and insurance businesses.

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