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American and Latin American Politics, Society, and Culture

October 5, 2009 By Fausta

Want bad news? Congress Dems want to expand Community Reinvestment Act

At Forbes, news on the next economic catastrophe, this time involving credit unions, insurance companies and mortgage lenders, not just banks:

A Poisonous Cocktail
Expanding the Community Reinvestment Act.

The White House and Congress want to expand a 30-year-old law–the Community Reinvestment Act–that helped to fuel the mortgage meltdown. What the CRA does, in effect, is compel banks to seek the permission of community activists to get regulatory approval for bank expansions and mergers. Often this means striking a deal with activist groups such as ACORN or unions like the Service Employees International Union (SEIU) and agreeing to allocate credit to poor and minority areas that are underserved.

In short, the CRA encourages banks to make loans they would not ordinarily make. What’s more, these agreements often require that banks offer no-money-down mortgages and remove caps on how much debt a borrower can take on. All of this is done in the name of “financial democracy.”

Take a look at the amount of CRA-commitments forced on banks in the run-up to the 2008 financial crisis:

chart_398x249

Scott Johnson:

As for the speculative action on Wall Street that contributed to the crisis, Peter points out that Washington had a hand in that too. Peter argues that the Clinton administration fueled the speculation by bailing out big investment houses such as Goldman Sachs and Morgan Stanley five times during the Clinton years. The Clinton team not only pulled their chestnuts out of the fire from derivative investments around the world, they ensured that they actually profited from their risky behavior.

In finance they call this “moral hazard.” It’s like bailing a friend with a DUI charge out of jail, giving them the keys to the car, and throwing a six pack in the back seat.

Look who’s involved:

Now comes Rep. Eddie Bernice Johnson, D-Texas, and 50 other co-sponsors (all Democrats) of H.R. 1479 the “Community Reinvestment Modernization Act of 2009,” who want to expand the CRA to include not just banks but also credit unions, insurance companies and mortgage lenders. Congressman Barney Frank, chairman of the House Financial Services Committee, has supported the idea in the past. The SEIU and ACORN, along with a host of other activist groups, are also behind the effort.

President Obama has been a staunch supporter of the CRA throughout his public life. And his recently announced financial reforms would make the law even more onerous and guarantee an explosion in irresponsible lending. Obama wants to take enforcement of the CRA away from the Federal Reserve, the FDIC and other financial regulators who at least try to weigh bank safety and soundness when enforcing the law, and turn it over to a newly created Consumer Financial Protection Agency (CFPA). This agency’s core concerns would not be safety and soundness but, in the words of the Obama administration, “promoting access to financial services,” which is really code for forcing banks to lend to those who would not ordinarily qualify. Compliance would no longer be done by bank examiners but by what the administration calls “a group of examiners specially trained and certified in community development” (otherwise called community activists). The administration says, in its literature about the reforms, that “rigorous application of the Community Reinvestment should be a core function of the CFPA.”

For good measure, Obama’s plan also calls for the CFPA to work closely with the Department of Justice to combat perceived discrimination in lending.

What this will amount to is the worsening a financial crisis through expanding bad debts, while at the same time there’s a credit crunch affecting small businesses.

Insane.

Or, as Dennis, who sent me the link, said, “Folks, this is Loony Tunes.”

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Filed Under: ACORN, Barack Obama, business, Democrats, economics, economy, housing Tagged With: Community Reinvestment Act, CRA, Fausta's blog

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