NR 97-65
July 15, 1997

NOTE TO EDITORS

In the attached speech, Comptroller of the Currency Eugene A.
Ludwig asks whether, in light of  the fundamental changes in the
financial services marketplace, the principles underlying the
Community Reinvestment Act (CRA) should be extended to cover the
broader financial services industry.  "As we move forward into
the 21st century, I believe we must begin now to seriously focus
on this central question," Mr. Ludwig says.  "To what degree
should financial providers besides banks be asked to step up to
the plate and participate in a CRA-like program as the banking
industry has done?"

Mr. Ludwig emphasizes that helping "low and moderate income
Americans have fair and equal access to financial services does
not necessarily mean the imposition of a CRA-type of
responsibility [to other financial service providers] in a rigid,
one-size-fits-all way."  The Comptroller suggests several
alternative ways that CRA-type principles could be applied to
other financial service providers. 

                              # # #

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. 

                          Remarks by 
                        EUGENE A. LUDWIG
                  Comptroller of the Currency
                          before the 
                     Director's Roundtable
                    San Francisco, California

                          JULY 15, 1997

During a recent meeting in Italy, I dined with a prominent bank
supervisor who spoke of the fabled connection between Rome's
greatness and the seven hills upon which it sits. I replied that
by the same logic, San Francisco, built on twice as many hills,
must be twice the town! 

Not that I make any pretense of impartiality about the City by
the Bay. It has been called the most European of all American
cities, but I think that comparison mostly flatters the
Europeans. As my flight approached San Francisco yesterday, with
the city's panorama stretching out before me, I recalled John
Steinbeck's description of the place:  "a gold and white
acropolis, rising wave on wave against the blue of the Pacific
sky, a stunning thing, a painted thing." It is always good for
the soul to return to San Francisco, a town long known as Yorba
Buena--"the good grass," a magnet for enterprising cattlemen--
until the name was changed in 1847, exactly a century and a half
ago.

There's another anniversary I'd like to talk to you about this
afternoon. Twenty years ago this fall, on October 12, 1977, the
Community Reinvestment Act was signed into law. That Act was
predicated on two basic assumptions: first, that America's inner
cities were desperately in need of new investment that the
Federal government, with its budget constraints, could not
provide by itself; second, that new private and public
partnerships and private sector pursuit of business opportunities
were needed to complement direct government subsidies. 

CRA also said that private corporations that provide basic
services and receive public benefits assume certain public
responsibilities. 

Twenty years after the CRA was signed into law is an opportune
moment to reflect upon the past and look to the future. Is CRA
still needed today? To what extent are the principles underlying
it still valid? What steps can we take to ensure that in the
coming decades we build upon the business and social benefits
that CRA has delivered in its first twenty years? And what
actions must we take to maintain the proper balance between
community needs and the legitimate interests of the industry? 

Let me remind you that in the beginning, there was considerable
skepticism that such a balance was even achievable. Extremists on
both sides shaped the initial debate. CRA instantly became the
banking industry's least-favorite law--a symbol of heavy-handed,
intrusive government interfering with the free market. Some
bankers raised the specter of credit allocation:  federal
bureaucrats, they charged, were impinging on the bankers'
responsibility to make those loans--and only those loans--that
conformed to standard banking principles. 

On the other side, some community advocates saw CRA as a panacea
that would mobilize private capital to fight and win the war on
poverty and urban blight--problems they blamed on tightfisted
bankers indifferent to the country's problems.

In the face of these unrealistic and irreconcilable fears and
expectations, federal banking regulators were slow to effectively
implement CRA. This was especially true in the early 1980s, when
the political climate turned hostile to regulation and government
mandates. In congressional hearings timed to coincide with CRA's
tenth anniversary, in 1987, testimony centered on the law's
failures. Despite continuing racial discrimination in home
mortgage lending, despite declining home ownership rates
nationwide and disinvestment in low and moderate-income
neighborhoods, the regulatory agencies were cutting back on the
time and personnel devoted to CRA enforcement.

This led to CRA reform beginning in 1989. The omnibus banking act
known as FIRREA required the public disclosure of each bank's CRA
ratings--the first time in American banking history that
confidential examination results were to be reported to the
public. Regulators stepped up CRA enforcement.
 
Despite these efforts, complaints persisted. Critics charged that
the CRA's rules and goals were unclear. The regulatory agencies
were cited for failing aggressively to penalize poor performance.
Bankers complained that the examination standards were applied
unevenly, and that the process seemed driven by paperwork
requirements rather than actual lending performance. 

So, in July 1993, President Clinton ordered the regulatory
agencies to develop new CRA regulations and examination
procedures that "replace paperwork and uncertainty with greater
performance, clarity, and objectivity." And that is what we did.
After hearing from hundreds of banks, community groups, small
businesses, government officials, and private citizens, we
promulgated new CRA regulations that featured clearer and more
objective evaluation standards, eliminated unnecessary
documentation requirements, offered more flexibility in defining
CRA requirements for large and small banks, and provided new
opportunities for public involvement.  

The results of our new emphasis on CRA compliance have been
heartening. Since CRA became law in 1977, we have witnessed more
than $215 billion of loan commitments for low and moderate income
lending. Remarkably, $175 billion--a full 81 percent of the
total--has happened in the past three years alone. Since 1993,
when I became Comptroller, home mortgage loans to low and
moderate income census tracts have risen by 22 percent, more than
twice as fast as the rate of growth in all home mortgage loans.
In the past four years, banks have invested four times as much in
community development projects as they did in the whole previous
thirty years. San Francisco has been a major beneficiary of these
lending partnerships. 

These numbers should make everyone in this room proud--bankers,
community leaders, and bank regulators. I am particularly proud
of the OCC for leading the effort. But the job is far from
complete. Despite the impact that community development
activities have made in the lives of our people--an impact I have
seen with my own eyes in visits to small towns and big city
neighborhoods all across America--poverty remains an intractable
and pervasive feature of American life. At last count, in 1994,
15 percent of our people--and 30 percent of the African-American
and Hispanic populations--subsisted below the poverty line.
Across our nation, two out of every eleven children live in
poverty, with all of its consequent ills: higher rates of child
abuse and neglect, lower immunization rates, high violent death
rates and high school drop-out rates. Two and a half million poor
children live in California alone, where housing costs squeeze
family budgets, aggravating the problems of inadequate food,
clothing, and medical care. 

Now, I have no illusions that CRA can bridge the huge opportunity
gap for low and moderate income Americans. CRA alone cannot solve
a myriad of problems--poor schools, crime, health care--that
afflict low and moderate income Americans. CRA is about doing
profitable business, making good loans, and providing services
for those low and moderate income Americans who are able to pay
for them. This is not to deprecate the genuine genius of CRA; for
unlike a handout, CRA brings people into the mainstream of
America's great free market, not as second class citizens, but as
full, responsible participants in their society. 

But even without CRA's structural limitations, we have to face up
to the fact that the banking industry can only do so much.
Perhaps the most difficult challenge over the long term is that
CRA covers an ever-shrinking share of the financial services
industry. The day may come when banks can provide all the
financial services low and moderate income Americans need,
including insurance and pension fund management.  But we are not
there yet. Nonbanks still dominate those critically important
markets and are now formidable competitors in markets which
bankers once did dominate. 

The rise of full-service nonbank providers as relatively
unregulated competitors for the business that once belonged to
bankers is a phenomenon with which all of you are familiar. The
numbers tell the story. In 1990, for the first time in history,
nonbanks held a larger share of the nation's financial assets
than commercial banks and thrifts combined. In 1993, for the
first time in history, mutual fund assets exceeded bank time
deposits, and the gap continues to grow. Today, Americans have
close to $4 trillion invested in mutual funds, compared to under
$3 trillion in bank and thrift deposits. In 1994, again for the
first time in history, commercial paper outstanding exceeded the
total value of bank commercial and industrial loans.

Several trends account for the loss of banking's once-dominant
position in the financial services market. Advances in technology
now permit nonbanks easily to obtain the information they need--
information that banks once monopolized--to make prudent and
profitable loans. Our global economy has brought new financial
competitors to our shores. Demographic changes--especially our
aging population--has created a demand for new financial products
and services, some of which banks have not been legally permitted
or well positioned to supply.  

Banks are also subject to rules and regulations not applicable to
their nonbank competitors. Most nonbank providers would admit
that freedom from regulatory restraints gives them an advantage
in any competition with banks. Finance companies, for example,
make loans the same way banks do, but they enjoy greater freedom
from capital requirements, limits on loans to single or related
borrowers, and limits on transactions with parents and
affiliates. Immunity from reserve requirements enables money
market mutual funds to offer depositors higher rates of interest
than the best managed bank could match. None of the non-traditional
financial providers need comply with the extensive reporting 
requirements that apply to banks and none is subject to similar
restrictions on corporate organization. And, of course,
none is subject to the CRA.

I ask you: does this make sense? In an era where all financial
services are converging, why does only one segment of the
financial services industry have to comply with a CRA-type of
responsibility? The answer can't be need. Our low and moderate
income communities would welcome with open arms the special
expertise, the products, and the resources that our nonbanks have
to offer. 

Nor can concerns about safety or profitability explain why CRA-like
principles have not been extended to nonbanks. CRA has hardly
damaged banking. Quite the opposite: the greatest era of CRA 
activity in history, the last three years, has also seen the
highest levels of bank  profitability in history. I would perhaps
not go so far as to say that the upswings in CRA activity and
bank profits are cause and effect. But there is no gainsaying the
evidence of mutually profitable relationships between banks and
their communities that have developed and are continuing to
develop in the CRA context.

I recognize that even to raise the question of whether to extend
the principles underlying CRA to other parts of the financial
services industry will generate controversy and elicit many
questions in response. Insurance and securities firms will ask:
how can we meet a CRA-like requirement for low and moderate
income lending when our business has nothing to do with making
loans? Mortgage companies, pointing to their growing share of the
low and moderate income mortgage and consumer lending markets,
will ask: what's the point of involving a third party to
encourage us to do what we are doing already? Pension fund
managers will ask: how can we be expected to reconcile outside
mandates with our fiduciary duties to employees and retirees? And
all nonbanks will doubtlessly ask why they should have to assume
CRA-like obligations when, according to them, they don't even
share in the public subsidies enjoyed by banks in the form of
deposit insurance, access to the Federal Reserve's discount
window, and so forth.

I do not believe these questions should keep us from considering
how the principles underlying CRA might be extended to embrace
the broader financial services industry. To help low and moderate
income Americans have fair and equal access to financial services
does not necessarily mean the imposition of a CRA-type of
responsibility in a rigid, one-size-fits-all way. Indeed, just as
our new CRA regulations enable us to differentiate between the
needs and capacities of both large and small banks, community
investment requirements for nonbanks could be flexible enough to
accommodate different corporate strategies and structures. For
example, nonbanks could enter into partnerships with Community
Development Financial Institutions in the same way that
conventional institutions have done--through co-investments,
contributions to lending pools, and so on. I have seen proposals
for parallel banks to establish and fund a National Reinvestment
Bank, which would provide a capital base for CDFIs. Making
insurance coverage more accessible and affordable would be a
worthy CRA-like goal. 

Let me emphasize once again that I am not endorsing any
particular arrangement--or any arrangement.  But I am suggesting
that we ask these important questions and begin thinking about
how these responsibilities should be shared.

There is no doubt that many nonbanks are already doing various
kinds of good work that serves the broader public interest. So
did many banks before CRA was passed. Nonetheless, CRA has added
value. It has helped bring banks and community leaders together.
It has given a sharper focus to the needs of our underserved
communities. It has given us a way of assessing our communities'
credit needs and measuring how well our lenders are meeting them
over time. It has provided a tool for ensuring that, for example,
mortgage lending by financial institutions addresses the housing
needs of all our people, not just the most affluent ones. It has
enabled us to separate serious programs from those that may make
good public relations sense but little long term difference in
the life of a community. It has enabled us to do a better job of
ensuring that basic financial services are available to all
Americans without discrimination. 

Finally, it is important that we address the question of the quid
pro quo that allegedly rewards banks for their CRA activities
with a supposedly lavish array of public benefits unavailable to
nonbank providers. We have been hearing much of late about this
so-called "safety net" subsidy. Let me say parenthetically that
recent empirical research finds that this bank subsidy argument
does not hold water--that only a small minority of banks receive
a net benefit, which is minimal at best. 

In the present context, however, we must keep in mind that
nonbanks enjoy significant public benefits, too--benefits that
reduce their costs of doing business and represent significant
actual and potential liabilities to the nation's taxpayers.
Although mutual funds and pension funds are backed by 
industry-funded guarantee associations, both the Securities
Investors Protection Corporation and the Pension Benefit Guarantee
Corporation have standby lines of credit with the U.S. Treasury--
$100 million for PBGC, $1 billion for SIPC. Securities firms have
access to the Fed's discount window. Insurance companies benefit
from a variety of congenial public policies: in most states,
insurers can deduct contributions to the guarantee funds from
their state taxes. Insurance annuities build value tax deferred.
Finance companies do a bustling business in federally-subsidized
loans to home buyers, small business people, and students. One
other thing nonbank providers share is the benefit of the
increasingly widespread assumption among investors that the
Federal Reserve would exercise its authority as lender of last
resort to stave off short-term liquidity crises for nonbanks as
well as banks.

We live in an age that is redefining--and quite properly so--the
role of government in the lives of our people. CRA--a law that
calls for no public expenditures, little bureaucratic
intervention, and local control--has become a model for this new
relationship. As we move forward into the 21st century, I believe
we must begin now to seriously focus on this central question: to
what degree should financial providers beside banks be asked to
step up to the plate and participate in a CRA-like program as the
banking industry has done? I look forward to fruitful discussions
on this question in the months ahead.

                              # # #

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.