American Banker
By Eugene A. Ludwig

The following is an excerpt from a speech on corporate social responsibility Mr. Ludwig delivered Sept. 23 at Adelphi University.

Many companies today have admirable programs and foundations designed to serve their communities beyond the products and services they create and sell. However, many companies do not.

I come from an industry where at least one part of it, the banking business, has an affirmative, statutory, and regulatory set of duties to serve its entire community, in particular low- and moderate-income elements of that community. These duties are part of something called the Community Reinvestment Act.

The application of the CRA has been a considerable success, having resulted in literally hundreds of billions of dollars of loans being made and services provided for low- and moderate-income Americans. And these loans and services have transformed neighborhoods all over America for the better and, of course, supported the overall economy.

One of the many virtues of the CRA is that it does not prescribe specifically how banks are to fulfill their responsibilities under the act, either from quantitative or qualitative perspectives. The statute very much relies on the ingenuity of those covered by the statute to fulfill their responsibilities under it.

I want to make two suggestions based on my experience with the CRA, an act that I at one point administered. First, I propose that the CRA be extended to all manner of financial institutions, not just banks. Second, I want to suggest that all American corporations should be urged by statute to consider their social responsibilities and report such steps, as they do take, to a database available to the public.

Of course, the CRA as it is currently drafted needs to be modified to reflect the different product and service mix of newly covered financial services entities and the fact that many of them operate nationally. In the spirit of the current CRA, which has operated successfully, covered institutions should be given maximum flexibility to support the targeted marketplace. Strict quantitative requirements should be avoided.

For example, these newly covered institutions should be asked to provide their products to the targeted markets and/or to devise modifications to their products that would be appropriate for these markets and/or support efforts by other financial services institutions to provide appropriate products and services. Financial firms should be given the flexibility to provide these products and services to those markets that are within their main services areas, or nationally, where they have widely dispersed products and no defined service area.

Indeed, this geographic flexibility ought to be provided to banks, as well.

Offering products and services in LMI areas does require a certain degree of expertise. Large financial institutions that are not banks either have or can acquire this expertise. For example, several insurance companies have CRA-like programs, and these programs have added value in LMI geographies. However, as noted above, for those institutions that do not have this expertise, they should be allowed to partner with community groups, such as the NeighborWorks networks, to serve these areas.

Nonbank financial institutions might also be given the option of providing all or part of their CRA assistance through the Community Development Financial Institutions Fund or in partnership with community development financial institutions.

The CDFI movement has been constrained by limitations in the federal budget.

Additional funds and assistance from nonbank, CRA-covered institutions would add to the success of this effort and support those geographies and fundamentally the same mission as that advanced by the CRA.

My second CRA-based thought is that corporate America that is not covered by the CRA should be covered by a federal statute that does two things in the social responsibility area.

First, it should contain language that encourages all companies to serve their communities in a fair and equitable way, and in particular low- and-moderate income communities, and to affirmatively support these communities’ well-being with time and money as appropriate. Second, companies should be obligated to report to a government-maintained and publicly transparent database what actions, if any, they do take to serve their communities, and in particular low- and moderate-income Americans.

I believe this database will itself accomplish two objectives. First, it will incent behavior by merely asking the right questions. Second, we will learn from the database, which will, I judge, contain a myriad of programs and ideas that advance the well-being of our nation and its citizens.