We Must Rein in the Regulators

Following the presidential election, advocates working for economic justice are alarmed that ultra-conservatives in Congress will turn back the clock on access to credit, capital and basic banking services for women, minorities and people with low incomes.

In spite of a national epidemic of predatory lending practices, the Republican leadership and the White House did little to address this problem in the past four years. Worse, regulatory officials actually disempowered the nearly 25 existing state anti-predatory lending laws by declaring them not applicable to national and federally chartered banks. In fact, proposed federal legislation, supposedly aimed at curbing predatory lending practices, was too weak to be supported by anyone active in the economic justice movement. Thanks to a tremendous amount of work by community organizations, and those in Congress like Sen. Paul Sarbanes (D-MD) and Rep. Barney Frank (D-MA), these industry-sponsored efforts were dead on arrival.

The main law that keeps lenders investing in underserved neighborhoods and the organizations that serve them, the Community Reinvestment Act (CRA), had until recently enjoyed a more bipartisan acceptance in Congress. But concerns among community development leaders have heightened as a result of the recent election. The Senate shifted more to the right and President Bush and his followers have characterized the election as a mandate. Right-wing extremists in Congress now believe they can accomplish things that were impossible in the president’s first term. Forty-four Democratic senators, bolstered by active community leaders and media input, still have the power to prevent a bloodletting of CRA and the other fair lending laws.

However, what we have less influence over is the surreptitious method now being used to undermine the spirit and the intent of these laws. Both the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) have led the charge to effectively negate the application of CRA to thrifts and banks.

In early 2004, after heavy public comment, the four major bank regulatory agencies (FDIC, OTS, the Federal Reserve Bank and the Office of the Comptroller of the Currency) agreed to leave unchanged the number of banks that fall under the comprehensive CRA exam.

Then, an unprecedented event occurred. The OTS, led by James Gilleran (a former small bank president who was appointed by President Bush in 2000) decided to ignore the joint agency decision and go its own way. In fact, after the four regulatory agencies had proposed to increase the definition of a small bank from $250 to $500 million in assets and then decided against it, Gilleran chose to quadruple the definition to $1 billion in assets! Small banks enjoy a “wink and nod” CRA exam that results in little reinvestment for underserved communities. Further, he announced that this change was to take effect immediately, without the opportunity for public comment. Another former small banker, Don Powell of the FDIC, chose to follow the OTS lead, but at least showed some modicum of respect for the public by asking for its comment first.

The effect of these undemocratic moves by Gilleran and Powell will be to remove more than 1,000 lenders from evaluation under a comprehensive CRA exam. Rural areas in America will be disproportionately injured by this change.

Following the election, Gilleran immediately proposed an even more devastating change to CRA. Gilleran would like to allow all lenders under his supervision to decide whether or not they wish to provide basic banking services or investments. If they choose not to, they would no longer be tested for these factors; their evaluation would be based solely on the lending they do in their chartered territories.

When Congress passed CRA, it made it clear that lenders had an “affirmative obligation to help meet the credit needs of the communities they are chartered to serve, including low- and moderate-income neighborhoods.” By giving lenders the option of not providing basic banking services or investments, OTS is in effect rewriting CRA to exclude certain credit needs. Because banks have closed branches in poor neighborhoods, people there have increasingly had to rely upon payday lenders, check cashers and pawn shops for their basic banking services. Yet, in middle- and upper-income America the actual number of bank branches has grown from around 28,000 in 1980 to over 71,200 in 2004.

The chilling effect of the regulators’ changes ought to be of concern to anyone who relies upon existing law to protect consumers from abuse or to promote fairer and equal access to credit and capital. The strategy of these non-elected officials is to rewrite legislation, overstepping their mandates. Where Congress wouldn’t go, these former small bankers are moving quickly. To be sure, several Democratic and moderate Republican members of Congress have noticed and have sent inquiries, sometimes strongly worded, to regulatory officials. But for the most part, these legal changes have gone unfettered.

Community leaders and elected officials concerned for CRA, and for that matter a number of other important laws and agencies (e.g. the Fair Housing Act, Fannie Mae and Freddie Mac, real estate disclosure) that could be altered not by Congress but by their regulatory agencies, must organize an immediate national response to this challenge to our democratic system of government.

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John Taylor is president and founder of the National Community Reinvestment Coalition.

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