[auto98uk]

On another thread, there is an argument going on about a section of a particular law - it is a little off-topic so it has been brought here:

(a) The Congress finds that—
(1) regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business;
(2) the convenience and needs of communities include the need for credit services as well as deposit services; and
(3) regulated financial institutions have continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.

(b) It is the purpose of this title to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.

I would like your thoughts on who these sections are aimed at - to me, part a is aimed at banks, and says that banks must show that they are serving their communities, and part b is about the role and obligations of the relevant federal financial supervisory agency in regards to what it is supposed to do. It does not, specifically, relate "safe and sound operation of such institutions" to the banks, but to the financial agencys.

What this has meant, according to many people in the USA, is that banks must give credit to people who otherwise wouldn't get credit, because a bank in a poor community has no option if it wants to prove that it is serving their community.


From Forbes.com:

It is popular to take low lending standards as proof that the free market has failed, that the system that is supposed to reward productive behavior and punish unproductive behavior has failed to do so. Yet this claim ignores that for years irrational lending standards have been forced on lenders by the federal Community Reinvestment Act (CRA) and rewarded (at taxpayers' expense) by multiple government bodies.

The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?

According to one enforcement agency, "discrimination exists when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants." Note that these "arbitrary or outdated criteria" include most of the essentials of responsible lending: income level, income verification, credit history and savings history--the very factors lenders are now being criticized for ignoring.

In other words, they were being forced to ignore normal lending critera, in order to make sure that they were lending to low-income people.

[foxy lady]

Originally Posted by auto98uk

a) The Congress finds that—
(1) regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business;
(2) the convenience and needs of communities include the need for credit services as well as deposit services; and
(3) regulated financial institutions have continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.

(b) It is the purpose of this title to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions..

Absolute hog wash. As is clearly stated in the highlighted section the requirement is for the lending only to be required if it is not damaging to the bank involved. There is certainly no requirement for the banks to take on sub prime borrowers or toxic debt.

[auto98uk]

Originally Posted by foxy lady

Absolute hog wash. As is clearly stated in the highlighted section the requirement is for the lending only to be required if it is not damaging to the bank involved. There is certainly no requirement for the banks to take on sub prime borrowers or toxic debt.

OH stop it. Read the first part of the section you keepo quoting, it does not refer to banks.

Do you now claim you know better than Forbes? If you have ever heard of them that is, which seems unlikely.

"It is the purpose of this title to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions."

It clearly state sthat that section relates to...well it says it right there.

[epiphany]

Originally Posted by auto98uk

What this has meant, according to many people in the USA, is that banks must give credit to people who otherwise wouldn't get credit, because a bank in a poor community has no option if it wants to prove that it is serving their community.

Indeed.

However, the idea of a private commercial bank "serving its community" under any circumstance is laughable for a number of reasons, the main reason being compound interest. The very nature of how the private banking system operates means that poorer communities will be placed into perpetual cycle of debt and ultimately become dependent on this constant drip feeding of interest laiden credit, with interest (purchasing power) being funnelled back into the casino of derivatives as opposed to being directly reinvested into infrastructure and public works.

The fact that the state would be encouraging/enforcing this process legitimises it on a wholly destructive new level.

This, I feel, is a perfect example of the government paradoxically trying to make the "free" market work.

[auto98uk]

Can i just check epiphany - had you heard of this [over-regulation/being forced to lend to unsuitable people] debate that happened in america before this thread? Because foxy lady thinks i am making it up.

[epiphany]

Originally Posted by auto98uk

Can i just check epiphany - had you heard of this [over-regulation/being forced to lend to unsuitable people] debate that happened in america before this thread?

Yes, absolutely. Pro-capitalist libertarians, with Ron Paul being the most outspoken, have been going blue in the face over this matter. I think some left-libertarians have also admitted that, actually, it's not the excesses of the "free market" that have caused irresponsible lending, since free market capitalism cannot be said to truly exist in the US, rather the misapplication of state regulation stimulating the worst excesses of these institutions.

In fact, ever since the repeal of the Glass Steagall Act by the Clinton administration (some of whom now reside in the Obama cabinet) and the resulting deregulation of the financial marketplace, government sponsored (not owned) entities such as Fannie Mae and Freddie Mac have had a freer reign to pump more privately backed credit into neglected communities. Zero regard for the long term implications or the big picture.

[auto98uk]

Cheers - I was starting to think that the reams i had read about it were all in my head.

[Bigthumb]

Originally Posted by auto98uk

Cheers - I was starting to think that the reams i had read about it were all in my head.

But as it only applied to the banks that operated under Government guarantee it was hardly relevant. It was introduced 25 years or more ago and has caused no problem due to those constraints. If it had I am sure it would have been a massive issue in the US elections that were held in the middle of the financial meltdown.

[auto98uk]

Originally Posted by Bigthumb

But as it only applied to the banks that operated under Government guarantee it was hardly relevant. It was introduced 25 years or more ago and has caused no problem due to those constraints. If it had I am sure it would have been a massive issue in the US elections that were held in the middle of the financial meltdown.

Before responding, I should point out that I don't believe that there is/was any over-regulation, in fact I think there should be much much stronger regulation - this debate all came about because i made a sarcastic post saying that "Thing is, in America it was caused by over-regulation, telling the banks that they HAD to lend to sub-prime borrowers. " - It was a certain school of thought in the USA that i didn't agree with, but it was a school of thought. Then foxylady said that it wasn't true because (s)he hadn't heard of it before, so i thought i would try and educate her a little, but she refused to admit that this school of thought even existed (because she hadn't heard of it).

So anything sounding like i support that view is/was me playing devils advocate.


The debate wasn't so much about whether that school of thought was correct, but about whether it was even an issue, and what the law quoted in the OP actually meant.

[Bigthumb]

Originally Posted by auto98uk

Before responding, I should point out that I don't believe that there is/was any over-regulation, in fact I think there should be much much stronger regulation - this debate all came about because i made a sarcastic post saying that "Thing is, in America it was caused by over-regulation, telling the banks that they HAD to lend to sub-prime borrowers. " - It was a certain school of thought in the USA that i didn't agree with, but it was a school of thought. Then foxylady said that it wasn't true because (s)he hadn't heard of it before, so i thought i would try and educate her a little, but she refused to admit that this school of thought even existed (because she hadn't heard of it).

So anything sounding like i support that view is/was me playing devils advocate.


The debate wasn't so much about whether that school of thought was correct, but about whether it was even an issue, and what the law quoted in the OP actually meant.

There have been plenty of crackpot theorists in the USA who have put this forward as a factor in the US meltdown. However these theories have been dismissed as unfounded due to the fact that only about 25% of the sub prime problem is actually from banks subject to the regulation, and most of the lending by these banks was as sound or more sound than the lending by the other 75% of mortgage lenders.

Perhaps you should cast an eye over this..

http://www.prospect.org/cs/articles?...ubprime_crisis

I will quote the relevant piece unless you really want to trawl through the entire report.


But CRA has always had critics, and they now suggest that the law went too far in encouraging banks to lend in struggling communities. Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money?

The evidence strongly suggests the latter. First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened.

Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.

Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households."

Yellen is hardly alone in concluding that the real problems came from the institutions beyond the reach of CRA. One of the only regulators who long ago saw the current crisis coming was the late Ned Gramlich, a former Fed governor. While Alan Greenspan was cheering the sub-prime boom, Gramlich warned of its risks and unsuccessfully pushed for greater supervision of bank affiliates. But Gramlich praised CRA, saying last year, "banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business."

[auto98uk]

Yes, I agree that it isn't actually true that it had anything to do with the meltdown - as i said in the last post that wasn't really what the debate was about