NR 97-20
February 27, 1997

                            Remarks by
                         Eugene A. Ludwig
                   Comptroller of the Currency

                              before

         National Council for Urban Economic Development
                         Washington, D.C.

                        February 27, 1997

Good morning, and thank you -- thank you for asking me here today
and thank you for participating in what truly is an important and
historic conference in the evolution of economic development in
this country.

This morning, I want to share my thoughts on the tremendous
progress made in community development in the past 20 years as a
result of the Community Reinvestment Act and the Home Mortgage
Disclosure Act.  I also want to discuss both CRA's additional
potential as an effective tool for revitalizing our cities and
communities -- and a potential threat CRA faces.

I believe that the past two decades have proved that the
Community Reinvestment Act of 1977, along with HMDA's robust
public information on bank lending activity, has been an
extremely important and far-reaching piece of legislation.  CRA
as initially implemented was not without its flaws.  However,
these shortcomings have now been addressed responsibly through
regulatory reform.  Today, CRA is more effective than ever.

In many ways, CRA was a law ahead of its time.  The philosophy
behind CRA is straightforward -- banks should serve all segments
of their communities, including low- and moderate-income
neighborhoods.  What makes CRA unique and groundbreaking is that
it relies on private sector ingenuity and market forces to
accomplish an important purpose.   In that way, CRA symbolizes
what the public has come to demand -- real results achieved, not
by government alone, but through government reliance on private
sector, local initiatives.  
CRA involves no massive bureaucracy, nor charitable giveaways. 
Indeed, as made clear in the revised regulations, CRA loans must
be safe and sound and should be profitable.  Further, through
what can only be called its catalytic power, CRA has spawned
hundreds and hundreds of collaborative public and private
partnerships -- partnerships that are continually bringing
sustainable capital to previously underserved, yet credit-deserving families and businesses and proving that where there's
a will, there's a way.

Of course, CRA's ability to produce these results has been
enhanced by the public having accurate data on bank lending
performance.  HMDA has provided that crucial data for home
mortgage lending, and because of recent regulatory changes to
CRA, we are poised to gain similar data for small business
lending.

The continuous democratization of credit has been the American
way throughout our history.  Democratization of credit is the
story of once novel, revolutionary approaches for extending
credit becoming part of the mainstream.  Because of it, today's
consumers and businesses have credit products that were enjoyed
by only a select few -- if any -- in earlier generations.  This
democratization of credit -- truly dramatic when considered as an
historic trend -- did not happen all at once.  Rather, it has
been a series of advances made possible because innovative
leaders have stretched the boundaries of conventional wisdom to
discover new ways to serve new borrowers profitably.  The
community development lending and investing stimulated by CRA
continues this trend of developing new profitable markets through
innovation.

I doubt if the drafters of CRA had any notion of the kind of
numbers we're now able to talk about twenty years after its
enactment.  Since CRA became law in 1977, we have witnessed over
$140 billion of loan commitments for community development. 
Remarkably, $100 billion -- a full 70 percent of the total -- was
made in the past three years alone.  A great deal of this
investment has been focused on increasing housing opportunity. 
As HMDA data show, the progress is significant -- home purchase
loans to African-American borrowers are up nationally 47.5
percent since 1993 . . . loans to Hispanic families up 36 percent
. . . mortgages made in low- and moderate-income census tracts up
22 percent.

Impressive results.  Indeed, CRA's successes give me cause for
optimism for the future of community development.  I'm convinced
that we are capable of taking community development to new
heights for a number of reasons.

First, we stand to learn a great deal more about the small
business market and local economic development needs in the
months to come.

As I alluded to earlier, this year, the public will -- for the
first time -- have comprehensive information on where banks are
making small business loans.  Banks and thrifts with over $250
million in assets -- those banks with nearly 85 percent of the
industry's assets -- will report aggregate small business and
small farm loan data as required under the revised CRA
regulation.

These institutions will report to their regulators information by
census tract on:

--   the number and amount of small business loans in three
     categories:  under $100,000; between $100,00 and $250,000;
     and more than $250,000.

In addition, they will report:

--   the number and amount of loans to businesses and farms with
     gross annual revenues of $1 million or less.

Regulators, in turn, will prepare small business and small farm
loan data disclosure statements annually for each individual
reporting institution, and aggregate disclosure statements for
each metropolitan statistical area (MSA) and the non-MSA portions
of each state.  Reports for individual institutions will contain
information for each county or assessment area with a population
less than 500,000 showing small business and farm loans made in
low-, moderate-, middle- and upper-income census tracts as well
as the number and amount of loans made to enterprises with annual
revenues of less than $1 million.

For each county or assessment area of more than 500,000, the
number and amount of small business lending and farm loans will
be broken down into more refined categories of census tracts
based on the area median income.  The aggregate disclosure
statements will indicate -- separately for each census tract --
the number and amount of small business and small farm loans
originated or purchased by all reporting institutions.

We do not know what the information will tell us.  But the lesson
of HMDA suggests that the data will create heightened
understanding of lending patterns and greater opportunities for
organizations such as yours to serve a constructive role -- both
interpreting the data and working with lenders to serve the needs
of local businesses for credit and capital.

Second, the new data on small business lending will support the
direction the market has already been taking in focusing on
serving the financial needs of growing enterprises.

Today, banks of all sizes are actively courting small businesses. 
According to the Small Business Administration, the number of
commercial loans under $250,000 increased by 8.9 percent
nationally from 1994 to 1995.

The total dollar amount for small business lending also increased
by 5.4 percent, or $8.3 billion.  And as reported in The Wall
Street Journal earlier this year, big bank portfolios of small
business loans rose 12 percent last year, outpacing the seven
percent growth in overall business loan portfolios.  In addition,
many banks have started to make use of credit scoring technology
to reduce the cost of lending to small businesses, and thus make
small business loans more readily available in smaller amounts
than might otherwise be the case.  

What we're seeing is a sea change in mindset.  As one industry
consultant has put it, banks are "viewing small business
customers as the upper end of the consumer credit market rather
than the bottom of the commercial credit market."

Third, community development is poised for greater success
because a secondary market for community development securities
is beginning to emerge.

A secondary market for community-based securities can offer the
prospect of extending the benefits of securitization to the
commercial side of community development, such as micro-enterprise, multi-family and small business lending.  While
securitization has proved a reliable -- and growing -- source of
funding for home mortgages to borrowers of all incomes, its
potential is largely unrealized as a resource to finance
community development beyond single family affordable housing.

There are several reasons why broader community development
securitization has been limited to date, such as a lack of
conformity in the underlying loans.  A second major obstacle to
this market's growth has been the fact that community development
securities typically do not receive a rating from a nationally
recognized rating agency.  Receiving a security rating can be a
very expensive and burdensome process, and the organizations
interested in securitizing and offering community development
securities often do not have the resources necessary to
accomplish this task.

Further, the underlying loans may lack long-term performance
data, making them difficult to rate even if the packager chooses
to use scarce financial resources to get a rating.  As a result,
community development securities remain an underutilized
investment option -- but one I believe is necessary to keep
capital flowing toward your community development efforts.

The OCC has received numerous requests from national banks,
community development loan funds and other community-based
organizations regarding investments in community development
securities. 

I'm pleased to announce today that the OCC is sending an advisory
letter to all national banks, clarifying how banks can invest in
community development securities and advising banks on how they
can receive CRA credit for these investments.

The advisory makes clear that national banks are, indeed,
permitted to purchase and hold community development securities,
even if they lack ratings or performance data, consistent with
safe and sound banking practices.

Recently revised OCC regulations permit greater flexibility in
this area.  Under the Investment Securities Regulation -- Part I
of the OCC's rulebook -- a bank can invest up to 5 percent of its
unimpaired capital and surplus in community development
securities if the bank has developed reliable estimates of the
security's performance.  

This performance documentation may be based on the bank's
assessment of the projects underlying the security, credit
underwriting standards, or credit enhancements offered by the
issuing organization that support the security and the underlying
pool of loans.  Other factors that can be considered are the use
of mortgage insurance, over-collateralization of small business
loans, and the issuer's commitment to repurchase delinquent
loans.  Over time, as securities develop performance track
records, it may be possible for an institution to invest a higher
percentage of its capital.

The advisory letter emphasizes that a bank's investment in
securities backed by a pool of loans whose purpose is primarily
community development is a qualified investment that receives
favorable consideration under the new performance-based CRA
regulation. The OCC recently issued a CRA opinion letter
explaining that a bank can receive favorable CRA consideration,
even if the securities are backed by community development loans
that are not directly in the bank's assessment area, provided the
loans are located in a statewide or a regional area that includes
the bank's assessment area.  This ruling should make it easier to
fund community development partnerships that serve a broad
geographic area, as many of yours do.  

Bank participation as both purchasers and issuers of these
securities is one pivotal way to stimulate this important market
-- and one that we feel can benefit communities as well as banks. 
But, clearly, the market's evolution will require the
participation of others in the financial services industry as
well.  Other players that can be instrumental in building and
securitizing community-based debt instruments include finance
companies, foundations and state and local government agencies --
including organizations like yours.

A fourth reason for optimism is that public and private
partnerships are being developed and are working to achieve
lasting results across the country. 

As I travel around the country and visit communities that are
being revitalized, it's apparent that sustainable economic
development requires concerted, coordinated effort.  It simply
cannot be forged alone.  The successful economic development
projects I have observed are most often built from broad-based
partnerships among the public sector, private businesses and not-for-profit organizations -- all of whom bring unique strengths
and assets to the table.  Collaboration is critical.

Local government officials like you have a leading role to play
as a catalyst and broker of resources.  You know your communities
best, and you have the opportunity to bring together those
parties that share a stake in your community's future.  You know
well -- and often control -- the availability of public
development resources.  To make community development work -- and
to develop a strong secondary market for CD securities -- banks
will depend upon your leadership to establish partnership
infrastructures where lenders see potential lending
opportunities.

The OCC can help in the creating strong partnerships.  Our
community reinvestment and development specialists are available
to assist you and the banking industry.  Our Community
Development Division here in Washington can work with lenders to
prepare investment proposals. 

As the public development funding landscape is increasingly
decentralized, here are some additional things for you to
consider.  You can help steer block grants toward credit
enhancement vehicles to better leverage scarce public sector
resources.

You can also help through efforts to reduce the processing time
it can take for public funds to get to the market and into the
deals.  Finally, I'd ask you to consider ways to offer technical
assistance to build the capacity of business development
intermediaries -- those intermediaries that provide information
on business development, business networking and mentoring to
growing firms and entrepreneurs in your community.

And finally, a cause for both optimism and concern.

I want to close with a few words about an important policy debate
in Washington that has far-ranging implications for community
development.  Twenty years after CRA was passed, another issue is
being discussed in Congress that has similar long-term
consequences for economic development -- financial modernization.

A few weeks ago, I testified before Congress and outlined the
five principles that I believe must drive financial
modernization.  One principle I focused on is that any reform
must broaden access to financial services for all consumers and
communities.  In recent years, the banking industry has made
significant progress in expanding access and reaching out to
previously underserved communities, and financial modernization
must build upon that success.


This principle comes into focus as we consider one of the
critical questions in the financial modernization debate --
whether banks should be given the flexibility to undertake new
activities, such as insurance sales and securities underwriting,
in subsidiaries of the bank, or should be required to set up
holding company affiliates.  I believe that anyone with a stake
in community development should have concerns about proposals for
financial modernization that would allow new activities only
within holding company affiliates.

What that will do is force assets out of the CRA umbrella --
which applies only to the bank -- and shrink the assets and
income available for community reinvestment.  If, on the other
hand, new activity is conducted within an operating subsidiary of
a bank, the income from that new activity flows directly to the
bank.  As income from new activity grows, that expanding pie
factors into the assessments of an institution's CRA obligation,
because the asset size of a bank -- including its subsidiaries --
is part of the performance context in which regulators evaluate a
bank's CRA performance.

Consequently, the shape that financial modernization takes has
crucial implications for anyone who wants the momentum for
community development to continue and grow into the 21st century.

                            Conclusion

I'm hopeful, of course, that the positive momentum created over
CRA's first two decades can continue into the next century.  The
successes we've seen to date have given thousands of families
renewed hope, and businesses and communities across the country
economic optimism.  Those who have pioneered innovation and
accomplishments are inspirations to us all -- but it's
increasingly important that we follow their lead and continue to
find new methods to bring long-term revitalization to America's
cities, towns and rural communities.

I thank you for all you've done for community development -- the
tireless hours, your commitment to innovation and a track record
of remarkable accomplishments.  I'm convinced that working
together, we can pass on to our children a truly revitalized
American community.
  
                              # # #

The OCC charters, regulates and supervises approximately 2,800 national banks
and 66 federal branches and agencies of foreign banks in the U.S., accounting
for more than half the nation's banking assets.  Its mission is to ensure a
safe, sound and competitive national banking system that supports the
citizens, communities and economy of the United States.