Following an onslaught of attacks in Washington on a federal law that requires banks to serve low-income communities, a Federal Reserve staffer is lambasting it for being outdated and unnecessary.
Passed in 1977, the Community Reinvestment Act is enforced by federal banking regulators, who give banks ratings based on their service to low-income areas in their primary markets. Regulators can prevent banks with poor ratings from making acquisitions.
Jeffery Gunther, a researcher at the Federal Reserve Bank of Dallas, wrote in a Cato Institute journal called “Regulation” that CRA is no longer necessary to promote access to credit, and that it imposes substantial costs and regulatory burdens on lenders.
Recent growth in mortgage lending in low-income neighborhoods stems from market forces, including deregulation and technology advancements, rather than CRA, he wrote.
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The article–“Should CRA Stand for `Community Redundancy Act’?”–reflects the views of some lawmakers who have tried in recent years to dilute CRA’s power.
Consumer advocates, however, are adamant that the law remains necessary.
“Banks tell us that they have discovered new markets in low-income and minority neighborhoods because of CRA pressure,” said Malcolm Bush, president of the Woodstock Institute, a Chicago-based community development think tank.
Merger concerns: The Woodstock Institute and a host of other consumer advocates are strongly opposing Citigroup Inc.’s planned acquisition of Associates First Capital Corp., the nation’s largest consumer finance company.
The marriage would create a “mega loan shark,” according to a statement from National People’s Action, a Chicago-based coalition of 300-some neighborhood groups nationwide.
NPA and other groups have asked regulators to prevent the merger on grounds that Associates is an unscrupulous lender, preying on people with spotty credit histories by offering them loans with high rates and fees.
Associates is the subject of hundreds of lawsuits and federal investigations by the Federal Trade Commission and the Justice Department.
“Associates has a very bad reputation,” Bush said.
Citigroup, for its part, says it plans to require Associates employees to adhere to strict lending guidelines if the merger is completed.
So-called predatory lending, particularly in the home-equity lending market, has become a growing issue nationwide as access to credit has increased, sometimes at too high a price.
The Federal Reserve may issue a long-awaited regulatory action against predatory lending in the next few weeks, Dow Jones News Service reported last week.
Meanwhile, state and city governments are working to crack down on unscrupulous lenders in their areas. The City of Chicago recently passed an ordinance preventing what it defines as predatory lenders from doing business with the city.
Bank Notes: Bank One Corp. has joined the growing number of banks issuing credit cards with smart chips on them. Although smart cards are common elsewhere in the world, the U.S. financial system is not well-equipped for them, and their uses here are limited.
Still, American Express has had success with its “Blue” smart card, and other card companies–including Bank One’s First USA–are trying to mimic that success and make U.S. consumers more aware of smart card technology.