Joe Mason: Goldman’s First Community Reinvestnment Act (CRA) Holdup

rc whalen's picture

My friend Joe Mason of LSU wrote a funny comment about the first experience by Goldman Sachs with the Community Reinvestment Act. The CRA is a form of legalized extortion whereby community groups selected and abbetted by members of Congress shake down banks for grants and loans in a given community.  Think of these community groups as the political antecedents of organizations such as Accorn and you've got the idea.  Most bankers I know treat CRA as a marketing expense, essentially part of the cost of lobbying state and federal officials that is written down.  Federal regulators even police compliance with CRA as part of their annual cycle.  Ultimately, CRA is a tax that is focused on one "needy" segment of the population.  Enjoy.  -- Chris


Goldman’s First CRA Holdup


Joseph R. Mason




Late last week it was reported that Goldman made its first
commitment to Community Reinvestment Act (CRA) lending. For the uninitiated,
this may seem like a good thing. Indeed, the papers pointed to the benefits of
an additional $500 million in small business loans in today’s economy. But to
those experienced in the industry, something more sinister may be afoot. Such
commitments rarely mean anything, and are usually merely the publicly-visible
component of a successful community organizer holdup scheme.


When Goldman became a Financial Holding Company, a variant
of a Bank Holding Company, it became subject to the Community Reinvestment Act.
But, historically, the CRA has been difficult to enforce. The objectives of the
Act are vague, providing no hard quantitative bar for CRA examiners to show a
bank is ether in compliance or violation of the Act.


Moreover, the only remedies for violation are regulatory
denial of a merger or expansion of the bank, upon the review of an application
to do so by the Federal Reserve or OCC. Hence, banks and bank holding companies
occasionally announce ambitious community lending goals to keep the regulators
and others off their backs.


Such community lending goals, however, usually turn out to
be little more than normal expected loan growth. Moreover, most banks do not
have systems to track those goals nor do they report progress toward the goals
later on. Indeed, when the OCC proposed in the late 1990s that the agency
record merely which banks had systems to track such goals, the proposal was
rebuffed by banks who alleged that regulations are meant to address outcomes,
not processes, and that imposing such a system would violate the regulator’s
obligations under the Paperwork Reduction Act.


Worse yet for Goldman, however, a familiar pattern (to
banking analysts) is one in which a bank or bank holding company applies for a
merger or expansion, and that merger or expansion is protested vehemently by
myriad community groups like ACORN. The protests are usually rebuffed by promises
by the bank to meet some community investment goal, much like that announced by
Goldman last week.


Leading up to Gramm-Leach-Bliley, it was also suggested that
that the groups seem to operate with tacit agreement that if the target bank
makes a sizeable “donation” to one group as a result of the pressure, all will
back off the protest. When Congress considered directing sunshine on the issue
by requiring as part of Gramm-Leach-Bliley that banks report the target groups
and amounts of such donations, the community groups rose up to stanch the
provision, with extreme prejudice. The final form of Gramm-Leach-Bliley
“requires banks and community groups to disclose the terms of certain
CRA-related agreements once a year. Community groups must explain how they used
the funds.” (“At a Glance: Gramm-Leach-Bliley Act of 1999,” American Banker,
November 12, 1999)


Hence, the big news about Goldman is not the community
lending goals, but which community groups may have moved on them first. While
the immediate lack of sunshine prevents us from knowing if any community group
successfully pressured Goldman, new entrants to the “banking” industry like
Goldman may pressure Congress to revisit the stricter requirements previously
proposed for Gramm-Leach-Bliley in current financial modernization bills.


As for Goldman, welcome to the banking industry!


† Hermann Moyse, Jr./Louisiana Bankers
Association Professor of Finance, Louisiana State University, Senior Fellow at
the Wharton School, and Partner, Empiris LLC. Contact information:; (202)
683-8909 office. Copyright Joseph R. Mason, 2009. All rights reserved.  Republished by permission of the author.