Administration Drafts Tougher Redlining Law

The Clinton Administration is planning a series of banking industry reforms that would include measures designed to prod large financial institutions to open branches and automatic teller machines in low-income areas, a top government regulator confirmed Monday.

According to a draft proposal obtained by The Times, a proposed revision of the Community Reinvestment Act would also require financial institutions to collect demographic data on business and consumer applicants to help regulators check on fair-lending practices with low-income and minority applicants. Lenders are now required only to collect data on home mortgage borrowers.

The act, the federal government’s main anti-discrimination lending law, is generally viewed as vague and ineffective. Lenders and community groups alike complain that the existing rules place too much emphasis on paperwork and slick marketing strategies and not enough on actual loans. President Clinton ordered a revision of the law earlier this year.

On a tour of South-Central Los Angeles, Comptroller of the Currency Eugene Ludwig, Clinton’s point man in the revision, decried the lack of banking services and the prevalence of check-cashing outlets. He then promised that the new bill would address the lack of branches and ATMs in low-income areas.

“Under the old rules, there’s too much paperwork--and too much emphasis on the paperwork--and not enough on the actual loans that were made,” according to Sharon Butler, vice president and director of community development at Great Western Bank, which has had a relatively good lending record in low-income areas.

Each lender undergoes an annual exam under the provisions of the act, and the results are made available to the public. An unsatisfactory rating theoretically can make it difficult for a bank to receive approval for a merger or for opening a new branch. Flagrant violations of anti-discriminatory lending laws can lead to criminal prosecutions.

Although regulators are promising to toughen the law, community groups were skeptical Monday that new regulations would significantly change the act, which has been on the books since 1977.

“We need a CRA that really looks at where banks take their deposits and makes sure they make loans where they take deposits,” said Wanda Smith, director of lending programs for the Los Angeles Neighborhood Housing Services, a housing advocacy group and nonprofit developer.

While the language of the revised Community Reinvestment Act does not specify where lenders must locate branches and ATMs, the rules would penalize lenders who do not offer such services, said the regulator, who asked not to be identified. The new rules do not require congressional approval.