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CRA Modernization Act Hearings On Tap

Adam Rust's picture

Posted September 15, 2009

The Obama administration is finally getting around to reforming our financial system, right when the underlying anger about banking may be relenting.

The experts who judge our economy believe that we may be about to exit this recession.  Ben Bernanke said as much today during a talk at the Brookings Institution.  He believes that unemployment has reached its peak, that we can expect moderate growth, and that consumer confidence is coming back.  All of that would point to a rebound.  Granted, the evidence is still not visible on Main Street - unemployment tops 10 percent in much of the country. In North Carolina, unemployment is currently 11 percent.  In foreclosure-rich states like California and Florida, unemployment has increased approximately 60 percent from July 2008.

Today is significant for a few reasons - for one, it marks the one year anniversary of the collapse of Lehman Brothers. 

That event has come to mark the moment when the costs of our economy's sins - subprime lending, cdo's, exotic mortgages - were finally realized.

Second, we are on the eve of the moment when the Obama adminsitration finally plans to do something about fixing what is broken with our banking system.  Tomorrow, the House Financial Services Committee will hold its hearings on the Consumer Financial Protection Act, followed by hearings on the CRA Modernization Act.

The New York Times suggests that the essential character of our banks remains unchanged.  One year after Lehman and Merrill were brought to their knees, geeks bearing formulas are back to their old tricks. Goldman employees are earning, on average, $700,000 per year.  The derivatives markets are back. Traders are securitizing life insurance settlements.

People might think that the gain on shares in the Dow 30 means a recovery has occurred.  That's not doing your due diligence.  Check out the numbers on delinquent mortgages.  Check out how few are being cured or modified.  There is more bad weather on the horizon.

The hearing on updating the CRA should provide some interesting theater.  The bill has 51 co-sponsors, which gives it plenty of credibility.  While NCRC chair John Taylor will surely speak on behalf of putting teeth back into the CRA, the testimony of NYU professor Lawrence White could produce some unexpected outcomes.  White is the provocateur of the CRA movement.  While he is generally keen to the principles behind CRA, he veers from most of its leaders in his belief that CRA needs to shed its historical emphasis upon geography.

The CRA originally sought to counteract the forces of redlining, where banks shunned entire neighborhoods from loans and services.  Those neighborhoods were generally minority (African-American, Eastern European) and low-income.  The language in the CRA specifically speaks to an affirmative lending obligation in low-income census tracts.

White wants to change that.  I am not sure if he wants to undermine CRA, so much as he wants to develop a framework that works with the scope of lenders and the new technology within banking.  Internet banking and mobile banking already remove some of the place in lending.  It is hard to see that trend changing.  Anyway, White's ideas are so unorthodox that he makes for an odd hearing candidate.  He may be the choice of someone with some contrary ideas about CRA, but he's hardly representative of voices of opposition or of support.

Last, the hearing will feature the Massachusetts' Commissioner of Banks.  Massachusetts is an unusual state in the history of CRA.  For one, it is the home to the groundbreaking Boston Fed study.  It is also a state that has generated its own state-level CRA process.  Significantly, it is a process that extends its reach to credit unions.  Credit unions are one financial actor that have previously been excluded from CRA obligation.  Language exists in the current CRA bill that would change that.