ARLINGTON, Va. – Across the country, a significant number of credit unions have begun to expand their field of memberships into areas that the federal government has defined as "underserved." Many of these areas were once served by banks that have picked up and left. The term "underserved" according to the federal government means areas that lack access to what it considers a minimum of banking services. But while the banking industry and its critics generally agree that banks have departed many smaller towns and lower income areas, there is a lot less agreement on why they have done so and whether banks have any obligation to stay or to come back. According to the NCUA, 223 credit unions added 424 underserved areas to their fields of memberships in 2002, yielding those credit unions an additional 23.5 million potential new members. Although there have been no studies of banks closing branches, banking officials and their critics admit that those places became underserved often because existing bank branches have closed. John Taylor, CEO of the National Community Reinvestment Coalition, which has sued the NCUA over how it discarded its Community Action Plan regulation, is perhaps the most vigorous advocate of the position that banks closing branches in small towns or low-income urban areas violates federal law. "Banks have an affirmative obligation in the Community Reinvestment Act to provide local communities with the banking services they need – and that includes branches," Taylor said. Taylor points to the CRA language which instructs that federal regulators must "assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods," when evaluating whether or not a bank meets its obligations under the law and should be allowed to open another branch. Failure of the regulators to apply this standard to bank branching practices violates the spirit of CRA and does not take a large enough vision of what the credit needs of an entire community might be, Taylor argues. He lays the blame for this turn of events on the "revolving door" between regulators and the banking industry that has made sure that no one would ever be in power at the top of the regulatory structure to apply CRA to a bank's branching practices. But the issue is not quite as clear-cut as Taylor asserts. Paul Smith, senior counsel with the American Banker's Association whose responsibility is CRA compliance, admits that banks close branches but points out that the CRA statute did not specifically assign banks any responsibility for branching. "CRA is a statute that was meant to primarily prevent banks from neglecting any population in its lending patterns, among other things," Smith said. "A bank can also close a branch for a lot of reasons." He also challenges the notion that banks across the country have been closing branches in small towns or low-income areas, pointing out that there have been no data presented to support this. "In some areas in New York," he said, "I can point to low-income areas where banks have been opening branches," he added. David John, a banking analyst with the predominantly conservative Heritage Foundation, a think-tank based in Washington, D.C., largely agrees with Smith. CRA looked at the practice of redlining certain areas out of loan availability, he notes, not where branches are located. He also observes that what has happened to bank branching is a good deal more complicated than it might appear from the outside. "What CRA was meant to do was to stop a bank, which served a 40 block area, from taking deposits from that area and then deciding that it would not make any loans in a given part of that area," John said. "It didn't speak to where a bank puts branches, and if you think about it, it couldn't," he added. "The Federal Government cannot go to a bank, a private entity, and tell it where to puts its branches." John blames the waves of changes in the banking industry for the closing of branches in different places. Although he acknowledges that there is a lack of data on why banks close branches, John estimates that many branches close as a result of mergers, which banks often undertake to be able cut costs through consolidation, in effect through closing branches. He also observes that the banking industry has changed a good deal and that a bank branch is no longer as necessary for providing services, as ATMs and the Internet have changed the ways banks dispense cash and take loan applications. But if credit unions have begun coming into these areas that banks have left, and have begun making money there, why did the banks leave? Why didn't they just stay and make the money? "How a bank might evaluate whether a branch is profitable or not can be a complicated calculation," John explained. "In some cases, a branch might do most of its business in a way that can be handled by an ATM," he said. Or a branch might not make the minimum amount of profit that a bank might need to justify its existence on a balance sheet, John added. "The bottom line is that most of the time bank branches follow economic activity, they don't lead it," John said. "In this way, a closing or opening bank branch can be like a barometer of an area's economic health." John observed that credit unions' non-profit and tax-free status might give them a competitive advantage in underserved areas, places where they can afford to make less of a profit on some products in order to earn longer-term gains or to gain profitability in other products. For Taylor, the issue for banks and credit unions still comes down to the obligations they share for the privilege of having federally managed and guaranteed insurance funds. Taylor confessed that, with the exception of community development credit unions, he remains a skeptic about credit unions moving into places where banks have left and maintains that banks and credit unions share a disinclination to take up their social responsibilities under the law. He maintained that NCUA was only following the industry's wishes when it scrapped the CAP regulation and said he would believe that mainstream credit unions had begun to move into areas where banks had left only when he saw it. "They will need to make me a believer," he said. [email protected]