Updated: Obama`s Financial Regulation Proposal
June 18, 2009, 03:56 PM
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Everybody has an opinion on Obama's proposal for revamping financial regulation. I've been busy so I have no idea what's in the plan, so I don't have an opinion.

But, let me make one guess: I bet there's not a single word in the proposal — nor, I presume, has there been a single word in all the commentary on the proposal — about moderating the anti-redlining push for more mortgage lending to minorities with poor creditworthiness that was so central to the Sand State subprime mortgage meltdown that set off the financial crisis.

After all, how can anybody talk about reforming this when nobody will even talk about the fact that the federal Home Mortgage Disclosure Act database shows that 77% of subprime home purchase mortgage dollars in California in 2006 went to minorities?

Update: Well, I was wrong. The White House White Paper talks about the new Consumer Finance Protection Agency intensifying the push for more lending to minorities:

The Agency should enforce fair lending laws and the Community Reinvestment Act and otherwise seek to ensure that underserved consumers and communities have access to prudent financial services, lending, and investment.

A critical part of the CFPA’s mission should be to promote access to financial services, especially for households and communities that traditionally have had limited access. This focus will also help ensure that the CFPA fully internalizes the value of preserving access to financial services and weighs that value against other values when it considers new consumer protection regulations.

Rigorous application of the Community Reinvestment Act (CRA) should be a core function of the CFPA. Some have attempted to blame the subprime meltdown and financial crisis on the CRA and have argued that the CRA must be weakened in order to restore financial stability. These claims and arguments are without any logical or evidentiary basis. It is not tenable that the CRA could suddenly have caused an explosion in bad subprime loans more than 25 years after its enactment. In fact, enforcement of CRA was weakened during the boom and the worst abuses were made by firms not covered by CRA. Moreover, the Federal Reserve has reported that only six percent of all the higher-priced loans were extended by the CRA-covered lenders to lower income borrowers or neighborhoods in the local areas that are the focus of CRA evaluations.

The appropriate response to the crisis is not to weaken the CRA; it is rather to promote robust application of the CRA so that low-income households and communities have access to responsible financial services that truly meet their needs. To that end, we propose that the CFPA should have sole authority to evaluate institutions under the CRA. While the prudential regulators should have the authority to decide applications for institutions to merge, the CFPA should be responsible for determining the institution’s record of meeting the lending, investment, and services needs of its community under the CRA, which would be part of the merger application.

The CFPA should also vigorously enforce fair lending laws to promote access to credit. Furthermore, the CFPA should maintain a fair lending unit with attorneys, compliance specialists, economists, and statisticians. The CFPA should have primary fair lending jurisdiction over federally supervised institutions and concurrent authority with the states over other institutions. Its comprehensive jurisdiction should enable it to develop a holistic, integrated approach to fair lending that targets resources to the areas of greatest risk for discrimination.

To promote fair lending enforcement, as well as community investment objectives, the CFPA should have authority to collect data on mortgage and small business lending. Critical new fields should be added to HMDA data such as a universal loan identifier that permits tying HMDA data to property databases and proprietary loan performance databases, a flag for loans originated by mortgage brokers, information about the type of interest rate (e.g., fixed vs. variable), and other fields that the mortgage crisis has shown to be of critical importance.

But, of course, the HMDA database is for prodding for more lending to minorities. Using it to check up on whether minorities are paying back their loans is unthinkable.

You can take Obama out of the ethnic shakedown racket, but you can't take the ethnic shakedown racketeer out of Obama.