Magazine article The American Prospect

Reversing the Damage: What Will It Take to Resume Credit Flows to Low- and Moderate-Income Neighborhoods?

Magazine article The American Prospect

Reversing the Damage: What Will It Take to Resume Credit Flows to Low- and Moderate-Income Neighborhoods?

Article excerpt

We have committed more than $8 trillion to bailing out banks, but one common lament, from many business owners and prospective homeowners, is that the very same banks are reluctant to make loans. We need to modernize existing laws and enact some new ones in order to restore flows of credit.

One immediate remedy is the CRA Modernization Act of 2009. This proposed law would strengthen the existing Community Reinvestment Act to make it more effective and expand CPA's purview to financial institutions other than banks.

Had the existing CRA covered independent mortgage companies, most of the unsavory lending practices that led to millions of foreclosures and brought down the nation's economy would not have occurred. Top economic researchers from the Federal Reserve have found that less than 7 percent of the high-cost, high-risk loans that are at the source of our economic and foreclosure calamity were made by CRA-regulated institutions.

As it turns out, regulatory oversight matters. A CRA-regulated bank would have CRA examiners looking over their loan portfolios and practices to prevent unethical, unsafe, unsound, and discriminatory lending practices. The regulatory oversight for non-bank mortgage institutions was all but nonexistent. The CRA Modernization Act of 2009 would level the playing field by treating banks and non-banks alike, while increasing average Americans' access to credit and capital.

Here's a list of lenders not currently covered by CRA:

* Independent Mortgage Companies (to name a few that have disappeared: Countrywide, Ameriquest, New Century Financial Corporation, Option One, Golden West)

* Mainstream Credit Unions (not predatory lenders but they lag behind banks in most areas in serving minorities and low-wealth borrowers)

* Insurance Companies (try being a business and getting a loan where insurance companies refuse to issue property or casualty insurance in your community)

* Securities Firms (Morgan Stanley, Bear Stearns, Charles Schwab, and others)

With the expansion of CRA to other financial institutions, we not only decrease unsafe lending practices but exponentially expand the responsible credit available to low-, moderate-, and middle-income neighborhoods for small businesses, homeowners, investors, and others. Literally trillions of additional private-sector dollars would be available for reinvestment in cities and towns, and all this without government subsidies (such as the $11 trillion welfare payment already appropriated for our financial-services system).

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The new legislation would also improve the system for evaluating banks, so that predatory lending and racial discrimination would be explicitly penalized. It would provide far more detailed data on lending practices. Lending to small cities and towns as well as to rural areas would also be explicitly covered.

BUT EXPANDING CRA regulation is not sufficient. The legacy of the sub-prime collapse is also an epidemic of foreclosures. Thus far, the administration's response has been far too feeble.

President Barack Obama's $75 billion program, Making Home Affordable, creates financial incentives to loan servicers, banks, and investors who modify loans. Yet the program is entirely voluntary for the banks. The one possible stick, proposed authority for bankruptcy judges to order modification of loan terms, was rejected by the Senate after the administration failed to press for it. …

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