When Barack Obama, the erstwhile community organizer, inserted the word "reinvestment" into the title of the legislation aiming to stimulate the whole economy, rather than just Wall Street, it was like waving a flag in front of the bulls. America's bankers have hated the Community Reinvestment Act of 1977 since it was passed. Not because of anything really onerous it requires them to do, but because it lets outsiders have a look at their books.
While some people who secrete their wealth in Switzerland or on the Caribbean islands may actually have something to hide, secrecy for some is simply their key to autonomy. Which is probably why the announcement that, in exchange for the Wall Street bailout, the bankers' books would have to be inspected, led not a few to reconsider and decide that maybe they didn't need the money, after all.
Then came the American Recovery and Reinvestment Act and they knew for sure that their worst fears were about to be realized. So, what's the problem with reinvestment? Come with me over the jump and I'll share the explanation I provided back in 1980 in connection with what was certainly the first challenge under the CRA in the state of Florida.
The following is what I wrote up for publication in the Gainesville Sun as a letter to the editor. Obviously, there was no length limit at the time and, in the interest of historical accuracy, I won't leave a word out now.
No Bank Near Mall
EDITOR, Sun: Today at 6:30 p.m. in Conference Room A of the Holiday Inn, University Center, representatives of the Regional Administrator of National Banks will hold a public hearing on the application by Florida National Bank at Gainesville to establish a branch at the Southeast corner of Newberry Road and NW 60th Street. The public hearing was requested by me, an interested citizen, and granted in accordance with the Community Reinvestment Act of 1977. Since many members of the public are not familiar with this regulation, I would like to take this opportunity to briefly describe the purpose of the legislation and its relevance to the application by Florida National Bank to open a branch adjacent to the Oaks Mall.
The Community Reinvestment Act (CRA) was initially passed to counter the common banking practice of collecting deposits in one community and then investing the monies in distant localities for a higher rate or return. The most pernicious form of this practice is called "red-lining"--the refusal to make loans or extend credit because of a subjective determination by an institution that a certain area of a community is a poor risk, regardless of the financial history or credit-worthiness of the person or persons seeking the loan.
"Red-lining" is illegal, but it is also very difficult to prove. The CRA is essentially a positive piece of legislation. It states that the benefits of federal regulation, inspection and insurance carry with them responsibilities to reinvest in the community whence the funds originate. When an institution seeks to engage in activities (such as branching, merging or relocating) which must be approved by its regulatory agency, one of the criteria that must be considered by the regulator in deciding whether or not to approve the application is whether or not the applicant has complied with the intent of CRA. The institution annually outlines its commitment to the credit needs of the community and the manner in which it has implemented the commitment in a CRA statement, which is available for public inspection at every main office and branch.
To supplement the institution's own assessment of its compliance with the intent of CRA, the public is provided, if so requested, with an opportunity to comment at a public hearing (to be held in this case today) on the institution's achievements and contributions to the economic growth and well-being of the community. This opportunity for public input is part of a general trend in federal legislation to foster local review and decision-making, which we have become quite familiar with in conjunction with the Community Block Grant Program, transportation planning, and environmental regulation.
Florida National Bank, at persent, has only one office, in downtown Gainesville, and seeks to open a branch in the western fringe area. It makes no claim that this branch will enable it to better serve its customers, but is clearly interested in penetrating what it considers a lucrative market to attract new deposits. The argument might be that it needs to attract additional deposits in order to meet the now generally acknowledged needs of downtown Gainesville, but Florida National's recent record is not encouraging. Given that Gainesville has a residential vacancy rate of only 2 percent (5 percent is considered essential if the worst units are to be eliminated), it is obvious that the community's greatest credit need lies in the area of housing. Yet, of 18 residential mortgage loans made in 1979, fully 30 percent of the funds went to census tract 22 (west of I 75) and none went to tracts 1, 2, 4, 6, 8 and 9 (in the center of the city). A shortage of funds doesn not seem a plausible explanation, since the bank chose to place 33 percent of its total assets in government and other investment securities--a greater percentage than was invested in such securities by the holding company of which it is a part.
While it is true that banks have not traditionally considered a prime source of mortgage funds, that is just the point. Tradition has given way in other parts of the country and banks have found it profitable to provide their fair share of the credit needs of the housing markets in their local communities--usually in response to pressure from the community, since the rate of return on mortgages involving greater risk has been proven false. The default rate on home mortgages is in the area of 1 percent to 1 1/2 percent nation wide, regardless of the affluence or age of the housing stock of the community.
There is one additional factor which must be considered in connection with this application for yet another financial office in the Northwest, and it is this factor which, above all others, leads me to conclude that the Florida National Bank branch application should not be approved. There are already over 20 financial offices in the Northwest sector of the community; two in the Southwest; none in the Southeast; and none in the Northeast (unless you want to count those on the east side of Main Street). The disregard of community needs and customer convenience, attested to by this pattern of geographic discrimination is outrageous. It is my hope that no new locations be approved until the needs of the rest of the community are met.
Our transportation experts have long been telling us that they build roads where the people are and our financial leaders assert that they too locate where the people are. Just as this community has recently availed itself of the opportunity to tell the road-builders that they've been doint it backwards, I urge interested citizens to come forward and tell at least one bank that it is heading in the wrong direction.
There are other ways to increase deposits and promote economic growth. A concerted effort by all our financial institutions to promote the revitalization of the inner city, which Florida National could easily spearhead for much less than the proposed branch ($785,000), would be a much more effective way to certify the financial establishment's commitment to this community. The city is currently debating the financing of a revolving fund to pay for the rehabilitation of our older housing stock as a necessary first step in bringing life back downtown where our capital facilities are now woefully under utilized. A rather minimal contribution from each institution to a non-profit private housing corporation, administered by the city and serviced by the institutions, would undoubtedly generate the kind of economic activity that Florida National now feels it is missing by not being located on the western fringe.
In short, should the community be successful in getting a denial of Florida National's application, we would merely be sending our financial leaders the message that we expect them to come up with more imaginative solutions to what are essentially our common problems.
As expected, the branch was approved, built and, after a few years, abandoned. Having been built on the wrong side of the road, it never attracted enough traffic to make it viable.
That almost thirty years later the problems are much the same is not a reason to be discouraged. Reinvestment is not a one-time thing. There's a constant need for it. At least now we have the mechanisms and legislation in place to get it done.