Comments on: Regulatory arbitrage of the day, CRA edition A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Cynic Fri, 13 Aug 2010 15:49:16 +0000 I wonder about the extent to which this is an unintended effect of CRA itself. At the time it was written, the assumption was that the core retail activities of a bank would take place through its branches. So it imposed standards based on the locations of those branches – to ensure that local deposits would be used to fund local lending.

When big national banks began to pursue subprime lending as a potential profit center, they might have opened branches in low- and moderate-income neighborhoods. But that would have extended their full-scope assessment areas, making it harder to hit CRA targets. Even worse, it would have undermined the whole point of the expansion – to muscle in on the highly-lucrative market for subprime products. They quite simply could not have originated a sufficient supply of subprime loans to meet demand while also complying with CRA. So they worked instead through affiliates and subsidiaries, which, unfettered by CRA, were free to steer a great many of their customers who had the credit to qualify for prime products into subprime loans. Problem solved.

Of course, this has a variety of perverse effects. For one thing, it provided a strong disincentive for banks to extend their services to the unbanked via the construction of new branches. For another, it placed much of the lending out of the regulatory spotlight, if not out of the regulatory purview entirely. And it set up a separate-but-not-equal lending architecture, in which the same financial behemoths had two parallel lending systems: one for residents of fairly homogenous and relatively affluent communities, and another for more heterogeneous areas, including their affluent and successful residents.

It’s neither an argument for more or less regulation. I think it’s an argument for more unified financial regulation. Crafting specific regulatory acts and agencies for specific functions has its benefits, but it never keeps pace with change. Having regulators with broad purview, who can rapidly retask to account for unfolding change, makes a good deal more sense. Now if only we had a reliable way to actually make them do that…

By: Shnaps Fri, 13 Aug 2010 13:50:18 +0000 This looks like a list of correspondent lenders to me. Calling WF the ‘parent company’ of these is misleading at best. Granted, they probably sell 90% of their production to Wells, but still. It’s like calling McDonalds the ‘parent company’ of Ripon Pickle Co., Inc.

By: AABender1 Fri, 13 Aug 2010 13:16:50 +0000 Actually, this is a fairly unintelligible and specious report.

First it completely misses the point of CRA. CRA was enacted to ensure that (i) deposits taken in one community were lent back into that same community, and (ii) those deposits were lent back at least proportionately to the low/mod income areas and/or people in that community.

The point was to prohibit banks from opening branches in one area and shuttling off those savings to be invested in another.

Second, CRA’s stated purpose is not to examine safety and soundness, predatory practices, or “high cost” lending. It looks at where monies are deposited (assessment area) and where monies are lent (lending and investment tests). Period.

Third, it is Fair Lending compliance (along with other consumer compliance regs like Reg B) and those compliance exams that review what the National People’s Action report discusses. That is why “high cost loan” data is included in a bank’s HMDA reporting. And fair lending and consumer compliance exams can include affiliate loans under certain circumstances. Moreover, the Home Equity Protection Act (HOEPA) of 1994 mandated that the Fed could enforce housing-related consumer protection standards to non-bank and affiliates alike. (They didn’t.)

As a result of HOEPA non-enforcement, more than half of the sub-prime, predatory lending happened outside the regulated banking and banking affiliate system.

So, they pick the wrong target, confuse the policy weapon of choice, and end up with some very wrong-headed prescriptions.