As a part of the sweeping legislation that has become known as the Financial Modernization Act, a compromise between the House and Senate has been reached. However, the largest part of the compromise was a debate over the future of the Community Reinvestment Act.

The original CRA, which was passed in 1977, required financial institutions to extend loans to low and moderate income families and minorities in cities where they were located. These institutions have since revised many of their underwriting practices and made lending standards more flexible.

However, with the new bill scheduled to be voted on by Congress within two weeks, it hasn't been clear the exact role the CRA would play in the financial modernization act. The act, which would allow banks, securities brokerages, and insurance companies to perform the services of all three businesses, would repeal the Glass-Steagall Act of 1933, which separated the services of financial institutions.

The final outcome of the CRA was a compromise between Sen. Phil Gramm (R., Texas) and the White House. It stated that in order for a bank to acquire or be acquired by a securities brokerage or an insurance company, it must have a satisfactory CRA rating. A bank must also have a satisfactory rating if it wishes to expand into the securities and/or insurance business on its own. For smaller banks, a CRA examination would be conducted every four years, and those rated outstanding would be examined every five years. Also, disclosure of all CRA agreements between banks and community groups is required.

Since the inception of CRA loans, they have become securitized into mortgage-backed securities pools. They generally had a significantly higher average coupon and were much riskier than those elsewhere in the market. Many investors are now saying that the new, weakened CRA should not have any effect on their value or stature in the marketplace, because of Treasurys "basically being better than 100 basis points over this point last year," said Ned Brown, president of Financial Modeling Concepts.

"The big banks that generate most of the volume on CRA loans will continue to make the loans," he said. "The smaller banks that Gramm helped get off the hook on CRA, maybe a few less loans."

The fastest-growing target market for lenders such as Countrywide and Norwest is in the lower income and minority families. "They will continue to do it, because that's who they're going after out there," said Brown.

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