There's a steady drumbeat being heard in Washington and increasingly outside the Beltway that finance companies, mutual funds, and insurance companies need to be regulated like banks.

In particular, the call is to bring these institutions under legislation or regulation similar to the Community Reinvestment Act.

I cannot speak for the mutual funds or insurance firms, but I can address this issue as it relates to finance companies. The notion that finance companies must be prodded by government regulation to lend to lower-to middle-income consumers and small businesses is misguided.

Historical Role

Our industry has grown and prospered largely because we already do what regulations like CRA would attempt to force us to do. In fact, finance companies began in the early 1900s as lenders to the underserved.

At that time, a new working class was emerging in the U.S. as a result of the industrial revolution.

However, during this period the average wage earner found it difficult to get a small personal loan. Commercial banks were primarily merchant banks and generally limited personal loans to those with considerable assets. Credit unions, which started in Germany, were just beginning as a movement in the U.S.

With few options available, many consumers of average means resorted to dubious lenders for their borrowing needs.

In the mid-teens, a philanthropic organization - the Russell Sage Foundation - started working with a group of lenders to change this situation by drafting a landmark piece of legislation, the Uniform Small Loan Law.

That law's intention was to provide an exception to the state usury laws so that consumers could legally obtain small amounts of credit at reasonable rates that allowed lenders to make a profit.

Automakers Point the Way

In the early days of the auto industry, it was almost impossible for a consumer to Net a car loan. So the car manufacturers formed subsidiaries to provide such credit.

It was not until 1928.that First National City Bank opened the first bank personal lending department, fully 50 years after the first consumer finance company was established.

This abbreviated history, I think, makes two points. First, finance companies were and still are the traditional lenders to average Americans. Second, our companies find markets that are underserved by other institutions and step in to serve them.

We also stay in those markets in good times and bad. In fact, when other lenders pull back, we move in aggressively to fill-that void. Much of Ford. Credit's growth over our 34-year history has come when banks tightened credit standards.

Imagine how much more damaging the "credit crunch" of 1990-92 could have been if our industry were subjected" to the same regulatory burden that, in part, numbed the banks into buying Treasuries rather than making loans.

Pricing Expertise

Perhaps what gives us an edge in serving new markets and underserved markets is the industry's expertise for pricing cost and risk.

Historically, banks have not been comfortable in the arena of marginal credits and of business segments that have high servicing costs. Possibly, some of these risks would have been viewed with a narrowed eye by bank regulators who view their job as protecting insured deposits rather than ennsuring that credit is available.

My industry, however, knows the higher cost of risk, which includes costs of compiling enough information to make a rational decision, costs of extensive servicing, and the cost of possibly higher losses. And we price accordingly.

We are also heavily regulated - a fact that is not understood. Besides being subject to state laws in every state in which a finance company operates, we also comply with a myriad of federal laws and their amendments relating to consumer protection and fair lending.

Disciplined by the Market

Since finance companies do not share in the federal deposit insurance guarantee, they are also subject to strict and swift market discipline through the credit rating agencies.

For example, the possibility of a ratings downgrade because of higher-than-expected loss trends will usually result in immediate action by a finance company to tighten loan underwriting and increase loan loss reserves.

In the rare case where a failure occurs, any losses are borne by shareholders and investors. Compare this efficient approach to the slow-moving pace of financial regulatory actions, where ailing institutions remained open too long at growing taxpayer expense.

As policymakers look at needed changes in the financial services system to make U.S. institutions more competitive in the global marketplace, I hope they will judge finance companies by their track record.

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