WASHINGTON - Federal Reserve Governor Lawrence B. Lindsey on Monday urged Congress to allow banks to make equity investments in low- and moderate-income communities.
"We need to increase the reward for lenders willing to lend where others are not," Mr. Lindsey told attendees at the National Reinvestment Training Institute's national conference here.
Allowing equity stakes would reward both banks, which could receive a greater return on their investment, and small business owners, who could rely on the bank's financial management expertise, he said.
Mr. Lindsey did not provide details of his proposal, but it comes at an opportune time. Congress is currently considering legislation that would repeal the Glass-Steagall Act and modify the Bank Holding Company Act's barriers to banking and commerce.
Congressional opposition to allowing banks to make equity stakes is "shortsighted" because low- and moderate-income communities need equity to foster business development, Mr. Lindsey said.
One reason low-down-payment mortgages help these communities so much is that they allow owners to build equity, which they can later devote to small business development, he said.
Mr. Lindsey also hinted that regulators have nearly completed work on proposed race and gender data reporting requirements for small business loans.
"We are slowly coming out with a workable solution," he said, adding that he doesn't want "to scoop" his counterparts at the other agencies by disclosing the final details.
Mr. Lindsey also defended the pace of Community Reinvestment Act reform, saying the issue is "too important to rush."
Regulators don't want the rules to be so strict that the banking agencies are allocating credit to specific communities, he said. "We are very concerned about this prospect," he said.
The rules also cannot radically depart from the status quo, he said, noting that extreme regulatory changes worry investors. "That may have unintended consequences," he said.
Mr. Lindsey also said he supports efforts to extend the intent of CRA to insurers, saying these institutions must provide their service to low- and moderate-income communities.
"Fortunately, I'm not an insurance regulator," he said, "so I don't have to write those rules."
He said community reinvestment works best when local residents propose their own solutions. He noted several examples of successful local initiatives, including one Chicago woman who revitalized her community by driving out local drug dealers.