Starting this Sunday, bankers from across the nation will be meeting in New Orleans, LA for the 2010 National Interagency Community Reinvestment Conference. This conference is sponsored by the Federal Deposit Insurance Corporation, the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of San Francisco, the Office of the Comptroller of the Currency, The Office of Thrift Supervision, and the Community Development Financial Institutions Fund.
Among the issues that will be discussed is how these institutions will address their responsibilities under the Community Reinvestment Act (CRA). For those not familiar with this piece of legislation, the Community Reinvestment Act was passed in 1977 to address the common practice of banks taking the publics money and not providing loans, opening branches, or otherwise supporting low- and moderate-income communities (a practice referred to as redlining).
As we look at the financial climate today we can see that once again we are faced with large disparities between the richest segments of society and the poorest. In addition, banks have taken large sums of public money under the bailout and have continued to tighten lending to even the most credit worthy of small businesses.
The Community Reinvestment Act has always been a seriously flawed piece of legislation. One of the most glaring flaws is a lack of any real enforcement. Although the consequences for not complying with CRA are fairly severe, such as freezing a bank branch network or fining the institution, these are very rarely used and the majority of banks pass their CRA examinations with flying colors.
The reason for this lack of enforcement is clear for anyone who’s spent any time in the banking industry. Looking at the regulatory institutions you’ll see that they are, in general, staffed by former bankers or future bankers. In addition, credit unions, insurance agencies and other financial, institutions do not fall under it’s purview in any way whatsoever.
In addition, there are a wide array of pseudo financial institutions such as check cashers, payday lenders and other unregulated entities that tend to have a broader footprint and delivery system in the low- and moderate-income communities that don’t fall under the CRA. Continuing to allow these organizations to charge outlandish fees for their services undermines the very essence of the American dream and the hurts at-risk communities in significant and lasting ways.
Furthermore much like there is a ban on legislators becoming lobbyists there should also be a ban on government regulators hiring bankers to examine the very same institutions for which they use to work and a “cooling off period” before a regulator can be hired by a financial institution.
The only solution for the systemic problems in the legislative and regulatory system is for Congress to completely scrap the Community Reinvestment Act and start over using a contemporary context in which to draft legislation.
A new Community Reinvestment Act, in order to be effective, would not only address the role that banking institutions play but would also:
- Include all of the institutions that hold public dollars
- Regulate check cashiers and payday lenders ability to charge rates in excess of 35% and create a national usury law
- Ban the practice of regulators hiring bankers and vice versa (or at least place some reasonable amount f time between the two to ensure that they are looking out for the best interests of the people)
Now is the time to make these badly needed changes. If we cannot find the political will now, in the wake of the largest transfer of public wealth into private hands in US history, I fear we will only continue to slap a band-aid on the cancer that has infected our banking system and will see the gap between the haves and have-nots expand beyond our wildest imaginations.
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