Posted on 03/18/2009 10:00:37 AM PDT by Ernest_at_the_Beach
Abstract
This paper discusses the difficulties of applying the Community Reinvestment Act to banks. It finds that the complications of community investment needs and the opacity of compliance formulas make any banking act too small a commitment to have real effects.
Introduction
The objective of this paper is to suggest some of the complexities of economic investment with respect to the Community Reinvestment Act (CRA) that make the algebraic formulas of compliance far out of range of true measurement. I will discuss some of the ways that the government has attempted to implement CRA compliance, what this reveals about the implicit model for investment and how the metric for CRA compliance might be modified to better address the issue.
To address the issue of under-investment and underdevelopment in locations in need of a business stimulus, in 1977 Congress passed the Community Reinvestment Act (CRA). The law appoints overseers of the CRA interest (mostly the Federal Reserve Banks, but in some cases the Comptroller of the Currency) and rewards successes. Different minorities have very different issues in finding funding for entrepreneurial efforts. Inner city residents, who have been generations removed from individual ownership, respond differently than new immigrant Asians, who may have family or community resources upon which to draw. Of course, the law makes none of these distinctions. Instead, the law asks the banks to do better, however they see fit. In additionto the difficulty this creates, the law subtly encourages a cynical attitude to the process. The rewards follow whatever standards are created, not the ultimate social effect, because the time line for the rewards is so near. The results are calculated each year.
The CRA also overlooks the deeper analysis of community needs. If a Native American community needs infrastructure creation far more than it needs cash for some consumer goods, the CRA has no eyes to see it. This, unfortunately, is the most critically important point of this paper. If the complexity is too large and the measurement too arcane, then the law promises what it cannot deliver and leads to frustration all around--for politicians, for regulators, for bankers and for citizens looking for economic improvement in their neighborhoods.
If the CRA is given a hopeless task, we can at least see what it does and how. It is overseen by the Federal Reserve Bank system, which is charged with measuring and enforcing compliance. Most banks are regulated by this system, a small minority by other agencies). Because the standards must fit a complex and changing situation, the different Federal Reserve Banks have had to use different standards to judge compliance.
The target of CRA compliance is investment in low and moderate income areas. Because these differ in so many ways across the country, it is impossible to fix a single standard. The CRA does not even try. It lets the banks determine how investment is made and measures the success, or failure, solely by the dollars invested.
The CRA loans should NEVER be allowed to be scrutinized or collateralized.
It is impossible for investors to track the average credit score of any bundle or CDO or CDS.
Therefore, since privacy laws prohibit publication of private data -—
Government should prohibit any chance that high risk loans enter the securities market.
Let the LENDER, the ORIGINATOR, hold the risk!
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Conclusion
This paper has set down some of the difficulties involved in the CRA. It has shown, in particular, that the effort to find an objective measure of CRA compliance relies directly, and entirely, on measuring how much money was put out for investment in the under-served community. The measures do not ask if the investment is for better roads, more reliable electric power, or another liquor store. The measures do not ask how many jobs were created. Yet if these are the true aims of the CRA, why should a bank be involved in devising them? That is not the reason banks were created. That is not what banks are good at. If government can come up with initiatives, let the government attempt them. A further benefit of governmental responsibility is that the initiatives and the results can be evaluated in the political marketplace, where it belongs
Thanks Ernest!
McCain: There’s plenty of blame in AIG mess
KTAR News Talk FM 92.3 Phoenix, Ariz. | 2009-03-18
Posted on 03/18/2009 9:26:38 AM PDT by rabscuttle385
http://www.freerepublic.com/focus/f-news/2209183/posts
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