WASHINGTON — The drive to revamp the regulatory system could breathe new life into a long-simmering effort to modernize the Community Reinvestment Act.
Advocates who have long sought to expand and deepen the 32-year-old law that requires banks to serve low- and moderate-income borrowers in the markets where they take deposits argue that the time has come to broaden its application to nonbank lenders and credit unions and to add disclosure requirements.
Though critics of the law, including many Republicans who claim it helped fuel the financial crisis, are expected to remain opposed, most observers said the odds in favor of some kind of action are growing.
"There is a real desire on the part of Democrats to attach this as some part of financial reform … . I keep saying to my friends that want to get the optional federal insurance charter, there's no way you get a federal charter for insurance and not get something like this," said Mark Calabria, the director of financial regulation studies at the Cato Institute, a libertarian think tank. "You are going to have a louder debate than you have had in the past because I think you are going to see Republicans more willing to raise concerns and part of the rationale for that is to put moderate Democrats in more of a tight spot."
At a House Financial Services Committee hearing on the topic today, Rep. Eddie Bernice Johnson is scheduled to testify on her bill to expand CRA beyond banks and thrifts to nonbank financial entities, including the operating subsidiaries of banks, credit unions, insurers and mortgage brokers. It would also add a slew of reporting requirements, including the race and gender of small-business borrowers.
"It's time for the Community Reinvestment Modernization Act, and if all of the financial institutions were covered by the act, there would be much less chance of all these foreclosures," the Texas Democrat said in an interview Monday. "It strengthens the accountability of banks, addresses the racial disparities in lending, penalizes banks that engage in predatory and abusive lending practices, holds banks accountable by providing more publicly available bank ratings and requires federal regulatory agencies to hold more public hearings and meetings when banks merge. The financial institutions, the mortgage companies that got into a lot of this predatory lending, are not covered by the CRA, and the purpose of putting them there is to make them more responsible."
Though bankers would welcome seeing their credit union rivals forced to comply with the CRA, they would prefer to see regulators make CRA credit more flexible, and they oppose the additional reporting proposed in the Johnson bill. "Some of the more onerous data collection things that she's calling for in her bill — like additional Home Mortgage Disclosure Act data, all the way up to small-business collection data — that's something that we've protested," said James Ballentine, the director of grass roots and community development at the American Bankers Association.
Ballentine argued that the factors behind small-business lending go beyond ability to repay.
These factors "cannot be collected in raw data, so it may give an impression of a loan outcome, when that's actually not the reason for acceptance or denial," he said.
But proponents argued that reform is overdue and the legislation needed.
A brewing undercurrent of the discussion is that President Obama's regulatory reform proposal calls for relocating CRA enforcement in an independent consumer financial protection agency. So far, House Financial Services Committee Chairman Barney Frank has proposed letting CRA enforcement stay put with safety and soundness regulators.
Some advocates argue that regulators are lackluster at enforcing CRA and give banks passing grades too easily. They are lobbying Congress to go forward with the Obama plan.
"We have learned that you can pass great laws but if you do not have an agency that is willing to enforce the law, both to the letter and to the spirit of what is intended, then Congress's work can be undermined," said John Taylor, the president and chief executive of the National Community Reinvestment Coalition, who is expected to testify at the hearing. "We are disappointed that the leadership of the House Financial Services Committee has proposed a CFPA which does not enforce CRA. We have a national effort under way to contact all members of Congress to get them to understand."
The community group is also supporting efforts to expand CRA. "It's about not allowing the banks to hide their operating subsidiaries or affiliates from the purview of the CRA exam," Taylor said. "It's about getting race included, it's about making sure that small-business reporting is now considered in the CRA exam and that it's reported in detail like the home mortgage lending is. It's all that."
Orson Aguilar, the executive director of the Greenlining Institute, who is also to testify, said his group supports the reporting of race and also wants to see the rating system expanded.
"We've lost the spirit of CRA," he said. "We can be a little more creative with the ratings to add an 'outstanding plus' for the really top performers, to make the ratings a lot more meaningful."
Like many others, Aguilar said that a broader regulatory reform bill remains the best hope to change the law. "We're hoping that this will be the year for some major changes for CRA," he said.
Ellen Seidman, a former director of the Office of Thrift Supervision and now director of the Financial Services and Education Project at the New America Foundation, said that she senses momentum for some kind of expansion. "Whether it's in the form of a modernization bill or whether it's in the form of a pinpointed amendment to the statute, I think, is very much up for grabs," she said. "If you just go through the statute, you can make some changes in it that would accomplish a lot of the same goals given that you've now got some regulators who seem interested in actually doing something on the community development front."
The financial crisis should give lawmakers an opportunity to refocus on the law, which has not had much attention recently, she said. "Nobody has been seriously thinking about CRA in a positive way in quite a while," she said. "Trying to put community development more centrally into the statute is something that I think is important, and I think you'll hear a lot about that."
She also said other ideas are floating around on how to modernize CRA, for example, enticing institutions with incentives.
"If people are really lending in their own communities and are doing a good job of it, why not give them a break on deposit insurance premiums?" she said. "I think there has to be some positive incentives because the negative ones are not necessarily enough to be sufficient."