Sponsored by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision (The Agencies), the Joint Public Hearing on the Community Reinvestment Act Regulation was held in Arlington Virginia on July 19, 2010. We provided testimony for the hearings.
Congress passed the Community Reinvestment Act (CRA) in 1977 “to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate income neighborhoods, consistent with safe and sound operations.”
Our testimony follows a series of warnings we have issued since 1998:
- In an October 1998 brief filed with the Court of Appeals for the District of Columbia Circuit, we objected to the Citigroup/Travelers merger. We cited evidence that growing financial market malfeasance greatly exacerbated risks in financial markets, reducing the safety and soundness of large financial institutions. We went on to note that: “The nature of financial market activities is such that significant dislocations can and do occur quickly, with great force. These dislocations strike across institutional lines. That is, they affect both banks and securities firms. The financial institution regulatory structure is not in place to effectively evaluate these risks, however. Given this, the public is at risk.”
- On June 15, 2000, we testified before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises (GSE’s) of the US Congress. We suggested the GSE’s (Fannie Mae and Freddie Mac) be subject to a thorough “Social Audit.” Had they been subject to this audit, certain flaws in their operation, including ethical shortcomings, may have been revealed earlier and in a better market in which to make corrections.
- On December 22, 2003, we warned regulators that statistical models created by the firm using the Fully Adjusted Return ®Methodology signaled the probability of system-wide economic and market failure.
- On Monday, April 11, 2005, we testified before Judge William H. Pauley III in the U.S. District Court for the Southern District of New York on behalf of investors at a fairness hearing regarding the $1.4 billion dollar Global Research Analyst Settlement.
- On February 6, 2006, we warned regulators that statistical models using the Fully Adjusted Return® Methodology confirmed that system-wide economic and market failure was a growing possibility. See page 2: http://www.sec.gov/rules/proposed/s71005/wcunningham5867.pdf
- On June 18, 2010, we released a comment letter sent to Mr. Phil Angelides, Chairman, Financial Crisis Inquiry Commission, outlining our Transaction Cost Theory of the Financial Crisis. See: http://www.prlog.org/10746429-firm-releases-transaction- ...
Our CRA testimony focuses on:
- The best approaches to evaluating the geographic scope of depository institution lending, investment and/or deposit-taking activities under CRA. We seek open and market based CRA performance evaluation standards.
- We suggest the Agencies conduct a “credit needs” based review, subject to financial institution lending and service capabilities. In other words, we suggest they look at total credit needs in areas served by large and small institutions, calculate the potential impact that the institution has in meeting those needs, calculate the actual impact (number and dollar amount of loans provided), and use this metric as part of the CRA review process.
- We suggest the agencies revise CRA regulations to require that bank examiners routinely consider activities by affiliates.
- We suggest that the Agencies focus on opportunities to encourage "green" community development loans, "green" investments and "green" services to support projects that have a significant impact on a neighborhood.
- We suggest that the agencies’ evaluations of evidence of discriminatory or other illegal credit practices as outlined in the CRA rules are inadequate.
- We suggest the creation of a single online access point for CRA ratings, HMDA and small business data, accessible online, covering all regulated financial institutions and all affiliates, across regulatory agencies (OCC, OTS, FDIC, FRB, SEC, CFTC, etc.). We believe this would streamline CRA disclosures and performance evaluation reports, simplify compliance, improve consistency and enhance clarity.
- Finally, we suggest the agencies consider using the social networking sites (Facebook, Linked-In, etc) to collect public comments on the CRA performance of banks.
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