Round Two: Banks Need to Rebuild What They Broke

Moving forward we need more lending activities to be covered by our community reinvestment laws. Here are three ways our community reinvestment regulations need to be modernized.
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To rebuild the economy and bring hope back to tens of millions of Americans we need the big banks to do their part to fix what they broke. This is the focus of Round Two in our fight to keep the banks honest.

The starting bell for round 2 sounds today in Arlington, Va. as the first of four bank accountability hearings will be held by the nation's federal banking regulators.

As the recession lingers, the numbers -- 11 million jobs gone, 3 million homes foreclosed on, billions in pensions lost, tens of thousands of vacant bank-owned properties -- are so staggering that we can become numb to them. But in cities and towns across the country these numbers are all too real, representing fellow Americans struggling to find a job, save their home, or retire with dignity.

That's the mess. Here's how we clean it up.

In the lead-up to the foreclosure crisis, only 6 percent of the high-cost subprime loans were made by lenders covered by our community reinvestment laws. This means 94 percent of the high-cost subprime loans were made outside the law of the Community Reinvestment Act. The law works because banks get community reinvestment credit not just for making loans but for making good loans that meet the credit needs of the communities they serve and profit from.

Unfortunately, over the last decade the big banks moved much of their lending outside the law. In an effort to skirt community reinvestment laws, banks began doing their most questionable lending through subsidiaries not subject to the high standards included of the Community Reinvestment Act.

Moving forward we need more lending activities to be covered by our community reinvestment laws. Here are three ways our community reinvestment regulations need to be modernized to keep the banks honest and get good credit moving in America's cities and towns:

  1. Lending by Subsidiaries Must be Included in Bank Exams: Currently the big banks have the choice as to whether the lending of their subsidiaries is reviewed as part of the community reinvestment exam. So, if the lending of a subsidiary mortgage operation would help their score, they include it. If it would hurt their score, they don't include it. This is one of the only places in American life where you can choose which classes you are graded on. Because we have seen that community reinvestment regulated lenders perform quite well, we should make sure all bank lending activities are included in bank exams.

  • A Grading System That Works: We have a system in place to grade the community reinvestment performance of our nation's banks. Unfortunately, the big banks have figured out how to rig the system. Under the current rules, a bank, like Wells Fargo, who had a poor record on racial parity in lending (if you are African-American and get a loan from Wells Fargo it is 3.5 times as likely to be a high cost loan as when making a loan to a white applicant with a similar income) and is a big investor in payday loan shops that charge interest rates of over 400%, can receive an "outstanding" rating for meeting community credit needs. We need a rating system that holds banks accountable and ensures they provide quality credit that is good for America's families and communities.
  • Community-led Economic Development: If we've learned anything over the last few years it is that bigger is not better. Big banks and big oil have wreaked major havoc in this country and proved to be unaccountable to the American people. As we rebuild our economy we should put more control in the hands of everyday Americans looking to build wealth in local communities. Rewarding banks for economic investments that are community controlled and grow local wealth can be a game-changer for struggling cities and towns.
  • The banks created a crisis of incredible proportions. Last week Congress finally passed a bill focused on preventing another one. Now we need the banking regulators to step up and make sure the banks do their part to clean up the mess that they created. A modernized Community Reinvestment Act will be a critical step.

    You can help make sure this happens by attending one of the hearings or by sending comment to the banking regulators pushing for bank affiliates and subsidiaries to be covered by the law, a real system for grading that makes sure banks are advancing the common good, and rewarding banks that invest in community-controlled economic development.

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