The ground-breaking Community Reinvestment Bill, which will most likely become law in 2003, should be commended as a progressive move in line with the developmental nature of the post-apartheid government, in championing the needs of the poor.
The Bill is progressive in that it addresses the unequal treatment of communities by financial institutions, particularly banks. It follows in the footsteps of the United States Community Reinvestment Act of 1977: although the conditions are not the same, the premise is similar. The evolution of the Bill is a result of the perceived discriminatory nature of financial institutions, including allegations of ”redlining” poor communities, which restricts capital investment and contributes to the deterioration of these areas.
In its draft form, the Bill assesses financial institutions on the basis of their lending performance in previously disadvantaged communities such as townships and formerly white suburbs where so-called ”push-and-pull” effects led to capital flight from inner-city areas. In the latter case, the white population fled the influx of a predominantly semi-skilled black population from the townships, country-side and outside of South Africa.
Financial institutions have been wary of investing in these communities, to some degree because of their failure to understand the socio-economic and political dynamics of these markets. And, while they disinvested from the previously white communities, they failed to invest and adequately establish branches in the black townships. In some cases it was argued that, based on ”sound business practices”, it was impossible for banks to invest in poor communities because of the nature of community organisations, which resisted attempts to foreclose on delinquent properties.
The Bill seems to be sensitive to business concerns around this issue. However, almost any avoidance of community reinvestment can be justified on this basis by institutions that are simply not willing to reconsider ways of doing business. This law will be very weak indeed if this exception is granted too easily.
The major goals of the Bill are to ensure that more home-loan financing is available for low- and medium-income level borrowers, and to help prevent ”redlining” of communities characterised by high numbers of low- and medium-income households (the Bill does not include a definition of low- and medium-income households, which is still ”to be described”).
As noted in a South African Communist Party memorandum, a record of understanding signed with the Association of Mortgage Lenders, with a goal of providing 50 000 loans to lower-income borrowers within a year in exchange for compensation by the government for defaults, failed.
As the SACP memo says: ”The Association of Mortgage Lenders fell dismally short of the target and since the Mortgage Indemnity Scheme came to an end in June 1998 there was a void in housing policy in terms of managing access to credit in order to facilitate housing delivery.” Housing subsidies linked to credit have declined from 6% in 1994 to less than 2% currently.
The Bill describes requirements for financial institutions to comply with, including avoiding redlining (except where based on ”sound business principles”); communicating ”transparently and openly with borrowers” throughout the loan application process and especially on the outcome of an application, where written reasons for any denials must be given; and meeting targets for lending to households with low- or medium-income levels. The Bill does not specify what those targets should be.
It requires an annual report to be submitted to the Office of Disclosure, which must assess each financial institution, monitor its compliance with the legislation and apply punitive measures as prescribed. The methods for assessing performance are not specified, though certain features are outlined. The method must look at the amount of lending to low- or medium-income levels, lending in ”previously disadvantaged areas”, lending innovation, lending to small-business contractors, and an ”other aspects” category. The rating scale will be: outstanding, satisfactory, unsatisfactory or substantial non-compliance.
The US Act has been modified several times since its inception, adapting to changing circumstances including pressure from community groups to make it relevant. It has resulted in more than $400-billion in commitments by banks since then, as well as a host of other gains, including interest-rate breaks and other measures financially beneficial to lower-income borrowers, more flexible standards for credit-worthiness, affirmative marketing agreements, special loan programmes and homeownership and foreclosure prevention counselling programmes.
While the incentives/ penalties in the draft for non-compliance are not enough to ensure the goals for community reinvestment are adequately addressed, there is a need for strong community involvement in the process to ensure a proper review of the Act from time to time. But the Bill does not emphasise the role of community organisations in the monitoring and evaluating process. As a result, there is no political power to be exercised to gain commitments from financial institutions.
The criteria for evaluation in the Bill are vague. This requires tightening to avoid manipulation by financial institutions. Community organisations and interest groups are challenged to watch this legislation to ensure that regulations governing these evaluations become meaningful and not merely a rubber stamp. The target-setting for lending to low- and medium-income groups must be more specific, or public involvement in the regulations spelling out such targets must be extensive. It should ensure that loans to low- and medium-income groups are less expensive. Financial institution should be evaluated on whether they provide finance to social, cooperative housing and emerging small businesses as part of their community reinvestment obligations.
Mzwanele Mayekiso is a senior lecturer at the University of the Witwatersrand’s school of architecture and planning