Bill Would Require Insurer Minority Investments

WASHINGTON–Insurers would have to meet the same legal requirement as banks for investing in minority neighborhoods under legislation planned by two House lawmakers, it was learned.

The representatives–one black and the other Hispanic, who both hail from districts with a preponderance of minority residents–have alerted colleagues they intend to introduce legislation that would put Community Reinvestment Act mandates on insurance companies.

CRA requires the continual and affirmative responsibility of banks to meet the credit needs of low- and moderate-income neighborhoods where they operate.

In reaction to the legislators' plan, representatives of several property-casualty insurance trade groups said they would oppose the legislation, saying that such a mandate is inappropriate for insurers.

The plans by Democratic Reps. Eddie Bernice Johnson, Texas, and Luis Gutierrez, Illinois, to introduce the CRA requirement bill in the House were outlined in a “Dear Colleague” letter obtained by The National Underwriter.

In asking other members of the House to become co-sponsors of the “Community Reinvestment Modernization Act of 2007,” the two members of the House said CRA mandates, currently confined to banks and thrifts, “remain an effective fair-lending tool in today's rapidly changing financial services marketplace.”

They added, however, that “despite the progress, minorities, women, and low- and moderate-income borrowers continue to receive a disproportionate amount of higher cost subprime loans.”

One purpose of the bill, they continued, would be to extend CRA mandates to “all affiliates of financial holding companies authorized by the Gramm-Leach-Bliley Act of 1999,” i.e., mortgage companies, insurance companies and securities firms.

“Applying CRA broadly throughout the financial industry will leverage trillions of additional dollars for wealth building, homeownership, small-business ownership and economic development in working class and minority neighborhoods,” they said.

“Finally,” they added, “our bill will reduce pricing disparities in loans based on race, income and gender that threaten an increase in affordable homeownership opportunities.” Extending it, they said, would make “capitalism thrive in all neighborhoods by making financial markets more transparent and equitable.”

But Justin Roth, a director of federal affairs lobbying at the National Association of Mutual Insurance Companies, said NAMIC does not believe that CRA is “applicable in the insurance industry.”

He explained that insurers do not unfairly discriminate against low-income and minority areas. “They provide auto and homeowners insurance based strictly on sound actuarial principles,” he said.

“This legislation would only harm insurance companies and the policyholders they serve by preventing them from utilizing their assets in a manner that would maximize their ability to pay any future claims,” Mr. Roth said.

Cliston Brown, director of federal public affairs at the Property Casualty Insurers Association of America, added, “We have seen how catastrophic losses can occur unexpectedly and require immediate response from insurers to settle claims, and as a result, property-casualty insurer investment portfolios must be extremely liquid.”

He explained that CRA investments tend not to provide this kind of liquidity, and mandatory investments in these types of securities will reduce the amount of funds that property-casualty insurers will have available to pay policyholder claims, especially in emergency situations in which insurers need to make immediate payments.

“As a result, the proposed legislation's unintended consequences could create unnecessary hardships for policyholders in need,” Mr. Brown said.

Under the CRA financial institutions are annually tested in three areas. A lending test requires institutions to make loans, for example, to build affordable housing, in their market area. A service test requires them to have facilities in all areas that they serve. An investment test requires institutions to support development of affordable housing and other types of loans in their market areas, and make investments used to build affordable housing, outside the market area of the institution.