Bank Lawyer's Blog

Three Hurdles To Jump Pose No Obstacle To An Elephant

Banking compliance consultant Nancy Griffin thinks that bankers fear the "effects test" (i.e., "disparate impact"), which, I think, is correct. She also thinks that they should not be as afraid of disparate impact as they seem to be, because it's a three-part test and the "effect" is only one part.

The effects test is a three-part analysis:

1. The analysis starts with whether a policy or practice that appears neutral on its face has a discriminatory effect on a prohibited basis--disparate impact.

2. Next the test looks at whether the policy or practice that seems to discriminate on a prohibited basis actually has a business necessity supporting its use.

3. The final step is to determine whether there is a way to meet the same business necessity without such a discriminatory impact.

Obviously, step 1 has received all the press, and causes the most heartburn. The problem for bankers is that they rarely know what the "unintended" effects on a protected class of a facially bias-neutral practice might be. However, Nancy thinks that Step 2 is where the "real analysis" should begin.

The more accurate and effective the factors considered in evaluating credit are, the more accurately they will distinguish between good and bad credit risks. And, the accuracy of the factors becomes a powerful defense against any challenge of discrimination in effect.

Common sense should tell you that this works.

I have no problem with those statements.

As to step 3, Nancy claims that every banker should already be familiar with making this determination.

This type of analysis has been at the core of what is inaccurately referred to as "CRA lending."  The question in this phase is to figure out whether there is any other way to achieve the business purpose of distinguishing between good and bad credit risks than to use the factor that is challenged as discriminatory.

In looking for ways to make loans to low-income credit applicants, the industry has reevaluated almost all of the underwriting principles. Often, community groups asked banks to apply different debt ratios to low-income applicants or look instead to cash flow and proven ability to manage a high housing cost relative to income. In many situations, these loans could be supported by the alternative analysis. In these cases, there was an alternative way to make the loan that reduced any disparate impact of using ratios.

While she mentions the fact that many of these "alternative ways to make loans" went too far and resulted in some serious pain (in other words, the subprime mortgage meltdown), she claims this result has a "silver lining."

Some of the alternatives to basic underwriting principles have been tested and proven dangerous. This experience helps with the third step of the effects test. It makes clear that flexible underwriting is something to be done only with great care. Underwriting should not be changed simply to change the demographic effect. Before changes there should be careful research and testing.

I suppose that is true to some extent. However, I'm not as sanguine as Nancy that step 3 will be that easy to support in every case where the stricter underwriting standards that are used to achieve "QM" or "QRM" status are always employed. I can see the day, especially when the economy improves, when the fact that a bank is simply trying to meet the Dodd-Frank "safe harbor" underwriting standards is far from being a lock on satisfying steps 2 and 3. I especially think that an ideologically motivated Justice Department (and HUD) of the type we have in place currently, will remain unimpressed by any logical arguments that support a bank on steps 2 and 3 if they "find" that there's been a "disparate impact" on a protected class under step 1.

We need to remember that "disparate impact" itself is a questionable legal theory, so questionable that the US Justice Department fears its consideration by the US Supreme Court. Banks aren't scared of "disparate impact" claims only because they're so difficult to anticipate in the ordinary course of business, but because the federal government seems intent on using such claims to browbeat large settlements out of bankers on a cost-benefits basis (pay the government to end the pain), regardless of whether or not the highest court in the land would ultimately overturn the government. If the government is willing to use a questionable legal theory to serve ideological notions of "fairness" in credit redistribution (as it does in its quest for income redistribution), why would steps 2 and 3 deter it? If step 1 is bogus, why would objectively valid opinions that steps 2 and 3 favor the bank be impediments to simply alleging that they do not, and beating the bank over the head with litigation defense costs until it yields?

Yes, bankers fear the effects test. The fact that the test involves a three step process should provide only cold comfort to them.

The Latest Strong Arm Tactics From Large Cities

Critics of the Community Reinvestment Act and similar efforts to compel lenders to lend to lower income borrowers in lower income neighborhoods during the last twenty years or so, and who blame such efforts for the subprime mortgage market meltdown (a proposition I never supported), must be apoplectic over the latest efforts by some large cities to replicate the sins of the past. According to a recent article by Andy Peters in the American Banker, some cities are using the stick of municipal deposits to beat some low-income loans out of banks.

City councils in New York, Los Angeles and Pittsburgh have passed ordinances this year requiring banks that hold city government deposits to provide detailed accounts of their lending practices in low-income communities. Boston, Milwaukee, Minneapolis and San Diego are considering similar proposals.

Banks could lose deposits if city governments determine that they aren't doing enough in low-income neighborhoods. Lending data, broken down by neighborhood, will be made available for public inspection.

Cleveland and Philadelphia pioneered the concept of so-called responsible banking acts several years ago.

As banking lawyer Warren Traiger points, the dreaded CRA makes such efforts superfluous. When did that ever stop local hacks from PR stunts meant to convince voters that the city solons were sticking it to the big bad bankers?

Consumer advocates disagree, of course, on the basis that the CRA is a bust and that federal bank regulators aren't doing enough to make banks make the high risk loans to people who are poor credit risks and who otherwise have to resort to payday lenders, pawn shops, and guys like Paulie Walnuts. There's a reason that loans to lower-income, high risk borrowers carry high fees and interest rates: those borrowers default in greater numbers than lower risk, higher income borrowers. Banks shouldn't be taking greater credit risk unless they receive higher returns on the loans, to make up for the higher losses they'll take on the loans that aren't paid back. Pretty simple stuff. Nevertheless, municipal pols don't care about credit risk, rates of return, blah...blah...blah. They care about how this all looks to the voters whose favor they're trying to curry in order to retain their political positions.

I think Mike Bloomberg got it right when he recently vetoed New "Yawk" City's attempt to enact a similar measure. As the New York Bankers Association complained, such legislation adds "an unneeded layer of regulation that could discourage banks from doing business with city governments."

We don't need smoke and mirrors to improve people's lives. We need more private sector jobs. A lot more private sector jobs. In the words of this nation's First Black President, "It's the economy, stupid."

Misdirection

While the Department of Justice announced today that it will investigate the foreclosure practices of some of the big residential mortgage loan servicers arising from their alleged "robo-signing" of documents that were not actually reviewed by the person signatory, Housing Wire publisher Paul Jackson asks a critical question: So what?

But in the end, am I the only one asking: who really cares? Does any of this make it more likely that a borrower will suddenly be able to afford their mortgage? Isn't that what really matters?

What really should matter is this: as a nation, we have lost at least $2 trillion in wealth thanks to the economic downturn, led by an absolute collapse of our housing and mortgage markets. It’s a collapse we have all yet to recover from, as a host of well-intentioned but ill-fated policies have done nothing except prolong pain — not only for banks, who are still playing hide-and-seek with bad assets on their balance sheets, but also for borrowers, who are being lied to by our government and by the very consumer advocates who claim to wish to help them.

Read the whole rant. You'll be glad you did (assuming you're a banker and not a bank-hater).

Of course, our fearless leaders in Congress understand that at a juncture where many community banks are under the gun from so many directions, the economy is wallowing in the doldrums, and joblessness continues to impede a recovery, what one of this country's top priorities has got to be is the expansion of the Community Reinvestment Act and the toughening of its standards (paid subscription required).

House Financial Services Committee Democratic leaders introduced a bill [September 29, 2020] to expand the Community Reinvestment Act and impose stricter standards on banks.

The bill from Rep. Luis Gutierrez would make it tougher for banks to receive an "outstanding" rating on their CRA exams, add a new "sufficient" rating and require bank affiliates and subsidiaries to be included in evaluations.

"This is an important first step on the road to reforming and modernizing the CRA to better meets the needs of our communities and address the new financial marketplace," said the Illinois Democrat in a press release. "We are laying the groundwork for next year, identifying priorities, and evaluating what we have been able to fix and what remains to be fixed in our financial markets."

Yep, no doubt about it: you've got your "priorities" straight, Luis.

Another Wrinkle In The OneUnited Affair

In last night's post, I made the heinous error of blaming the OTS for the shortcomings of the FDIC. That's like slapping a little baby when you should be having Chuck Norris roundhouse kicking the baby's adult uncle in the face. Or, as alternative to Chuck, you could sic Ken Thomas on them.

Ken, a banking consultant, economist,and professor of finance at University of Pennsylvania's Wharton School, was quoted in the article I linked to yesterday. He's a blunt critic of the favoritism he believes was shown to OneUnited Bank in its campaign to get TARP money out the Treasury Department. According to the South Florida Business Journal, It turns out that's not the only thing about OneUnited and federal banking regulators that gets Ken's goat.

Three years before a congresswoman faced an ethics investigation related to OneUnited Bank, banking analyst Kenneth H. Thomas was mystified that regulators did not crack down on the bank for minimal lending in South Florida.

The nation’s largest African-American owned bank had only 17 loans totaling about $3 million in South Florida in 2005 and 2006, even though it had $77 million in deposits in the region, according to FDIC figures and an analysis by Thomas.

The Boston-based bank was rated “in substantial non-compliance” under the community reinvestment act in South Florida by the FDIC. It got a “satisfactory” rating overall, but Thomas filed comments arguing for a lower rating.

The passing grade may have been crucial to helping the bank qualify in 2008 for $12 million in troubled asset relief program (TARP) funds.

“There’s no way the bank should have passed,” said Thomas, who is based in Miami. “At the FDIC, someone just looked the other way and gave them the rating that the bank wanted – and that’s a satisfactory – because if they didn’t, that would have hurt the bank.”

The complaints by Thomas to the FDIC in 2007 had the same effect that a water balloon has on a raging forest fire. OneUnited Bank continued to make almost no loans in South Florida while it continued to suck up deposits from branches in the area, apparently in order to invest the funds elsewhere.

OneUnited has granted just three mortgages totaling $419,000 in South Florida since the start of 2008, according to court records. None of those loans were in Liberty City or Lauderdale Lakes, where the bank’s branches held $59 million in deposits as of June 2009.

“Oh my gosh. That’s tragic,” Miami-Dade Chamber of Commerce President Bill Diggs said. “If they’ve got that kind of money in deposits and they’ve only made three loans totaling $400,000, that is troubling to me.”

Oh my gosh, you're right, Bill. What's more, opening or acquiring out-of-state branches to use primarily as deposit-generating devices while you fail to make loans to the local community where the branches are located is a violation of law. Too bad federal law doesn't apply when the main squeeze of a powerful member of Congress owns a piece of the bank that otherwise would be subject to it.

I'm going to love to see what else crawls out from under the rocks that are overturned during this ethics investigation. I'm sure the FDIC can't wait, either.

OTS "Corrects" Me on Charter

My post of last Monday caused some people to sit up and growl, including current and former OTS employees. Not only the OTS wrote me, but also a number of others, including a member of the Wertheim family, and a few tin foil hat wearers convinced the entire affair was further evidence of socialist creep. A PR employee of the OTS even sent me links to "facts from public documents," for which I thanked him, even though those of us at Bank Lawyer's Blog prefer to wallow in the soothing, tepid waters of our prejudices and regard one man's facts as another man's damned lies.

Although I haven't spent a great deal of time following up on this, having to actually make a living from something other than blogging, here are some conclusions I've reached since my previous post:

• The former owners of the failed thrift, the Wertheims, seem like very decent people. They've done a lot of good for New Mexico, and it's sad to see their bank steamrolled by this crisis in real estate values, which is only getting worse, notwithstanding Panglossian blatherings by some snake oil salesmen in D.C. Also, "shoulda', woulda', coulda'" regarding real estate lending is a game for second-guessers who've never actually run a bank. Unfortunately, the Wertheims and the other directors and senior officers of the bank better be prepared for that game, because that's one the FDIC loves to play.

• An allegation made by more than one reader (all of them pro-OTS) was that the real estate assets couldn't have been worth what the Wertheims claimed because no other investors stepped in to buy the thrift before it failed. No acquirer in the current environment is going to buy a thrift the size of Charter Bank in the situation that Charter Bank was in after OTS-directed writedowns, when they know they can get a relatively risk-free deal if they just wait until the FDIC receivership and, if they win the bid, get loss coverage from the FDIC. As Bruce Hornsby sings, "That's Just The Way It Is." Given the the current paradigm (including the fact that open bank assistance for too-small-to-bailout community banks will never happen outside of that wonderfully unsuccessful TARP CPP), private investors who buy from the FDIC don't need to take any practical risk on future losses of commercial real estate assets compared to the risk they face if they acquire the same bank without the loss coverage on commercial real estate, even if they think that the OTS was overly aggressive in writing down the collateral values of those assets.

• The September 2009 Thrift Financial Report to which I was linked by an OTS representative support the OTS in countering Ed Morrissey's contention that at the time the thrift failed, the loan portfolio was substantially performing. Morrissey's article is wrong to imply that. The delinquency rates cited by Ed at the end of his article are not applicable to September 2009, when, as the OTS PR person pointed out to me, "Charter Bank had high levels of loan delinquencies, particularly in construction loans (single family and commercial) and loans for land: 19.48 percent of gross outstanding construction loans were at least 30 days delinquent and 22.88 percent of gross mortgage loans for land were at least 90 days delinquent." That's correct, a year after the OTS required massive write downs of the the value of real estate loans that were, at that time, substantially performing, the thrift was in trouble. How much of that trouble, particularly in the construction loans specifically cited by the OTS, was caused by overly aggressive writedowns and loss reserves with respect to loans whose history did not reflect the need for such levels of reserves and devaluations? For example, since a federal savings bank can't have more than 400% of its capital in nonresidential real estate loans, does it seem possible that a sudden deduction to capital might impair the thrift's ability to loan funds needed to keep particular projects or borrowers alive? Also, since the maximum loan-to-value ratio of residential construction loans is 85% and of nonresidential construction loans is 80%, do you think it might cause a problem with continuing to fund such a loan if the collateral value of that loan is suddenly whacked by a substantial percentage? Although thrifts have implied "salvage powers" to exceed such limits to salvage their investment, bank attorneys have seen cases recently where the regulators have ignored such implied powers and have required banks to stop funding loans or to start liquidating assets where regulatory limits would be exceeded. I'm not saying any of these events occurred at Charter Bank or contributed to the high delinquencies because I don't have personal knowledge, but I am saying that because you take a snap shot on September 30, 2009 and say on that date the financial condition of the thrift is X, that doesn't tell you why the thrift arrived at that point. The contention of former Charter Bank CEO Glenn Wertheim, as set forth in the press accounts quoted in last week's post, is that the relevant date to look at is a year earlier than September 2009, when the OTS made aggressive valuation allowance and collateral devaluation demands on loans that were performing. He claims that the OTS made this situation much worse than it had to be by taking such actions.  The "facts" sent by the OTS do not refute that allegation.

• The act of appraising a piece of real estate is as much art as it is science. An appraisal arrives at an individual's "opinion" of fair market value. Reasonably knowledgeable people can disagree on value, which happens all the time. In its order appointing the FDIC as receiver, the OTS claims that even accepting both management's analysis and a third party appraisal report (which the OTS rejected), the thrift was still "undercapitalized." That's like saying that even if we hadn't shot you in the head, you would have still had the flu. "Undercapitalized" means you're severely ill but salvageable. "Critically undercapitalized" means you're dead. Given the stakes, wouldn't a third valuation have been something the OTS could have found acceptable, using a mutually acceptable appraisal group? Why the rush to accept the worst-case appraisal, that of the OTS? Why the rush to close this bank down?

• Some readers objected to Ed Morrissey's blaming all this on CRA. I, too, thought that was Kool Aid drinking on Ed's part, which is why, if people had bothered to read my post, I didn't mention it. As I've said before, in my opinion, CRA was not responsible for the subprime mortgage credit meltdown and wingnuts who keep ranting about it condemn themselves as rebels without a clue. Thus, please stop setting up straw men to knock me down. My bloviations always have sufficient legitimate holes in them without manufacturing false ones. That said, Morrissey has a large readership on the right, and the fact that he's on the case of the OTS at all does nothing but add to the woes of a federal agency that needs not a single additional one.

• The OTS is not alone in its aggressiveness on real estate valuations and loss reserves. To me, it's no more aggressive than the FDIC, OCC or FRB (Barney Frank's letter notwithstanding). Community banks of all charter types are finding this out. Therefore, trying to single out the OTS as a renegade in this respect is a fool's errand. On this issue, charter flipping is not an answer.

• A colleague told me that the fact that I got so much feedback, especially from the OTS, is somehow complimentary of me. I disagree. I'm just some solo practitioner with a background in this area who fires off a rant four or five times a week at most, usually off the top of my head and with a beer in one hand (as evidenced by several typos in the first version of this post). I enrage as many as (or more than) I interest. Instead, I think it shows the defensiveness of the OTS to criticism from any quarter. As I reminded one of my OTS correspondents, the agency would have been better advised to simply ignore a crank like me. After all, I'm not a reporter, I'm one of those pajama-wearing "blogger" nutjobs.

A final observation. When Glenn Wertheim says that his family, like The Terminator, will be back--perhaps even back in the banking business--I believe him. His family's track record would certainly support that contention. I started working with the predecessor to the OTS (the Federal Home Loan Bank Board) when I joined the legal staff of a large savings and loan association in February 1977, and I've dealt with them for over three decades now. During that time, I've heard repeated calls for their demise, and generally discounted those calls. This time, however, I believe that the agency's days are numbered. Notwithstanding some brave talk from its Acting Director, I think people within the agency also believe it. Even with a dwindling assessment base, they appear to be aggressively eating their young, which is not a plan for long-term survival. This year or next, Congress is going to put a bullet in its head (although I think the federal thrift charter will live on for awhile). It may very well be that while the OTS won this "battle," the Wertheims will eventually dance on its grave.

FDIC Making It Even Harder For De Novo Banks

Regulators, like most of the rest of us, are adept at fighting the last war. Friday's release of Financial Institutions Letter 50-2009 is a classic case of slamming the barn door after the horses are loose.

The policy outlined in the Letter applies only to FDIC-inured institutions that are newly chartered or are less than 3 years old, and are non-member, state-chartered institutions. Currently, newly chartered banks and thrifts are subject to a three-year de novo period of higher capital requirements and heightened supervision and examination. FIL-5-2009 will extend this period to seven years. It will also increase the frequency of examinations, subjecting each such institution to a limited risk management examination during its first six months and full scope risk management and compliance exams and a CRA evaluation during the first 12 months. Thereafter risk management exams will be annual (not on an 18-month cycle) and compliance examinations and CRA evaluations will alternate on an annual basis.Of course, more frequent examinations mean greater expense to the institutions.

The FDIC is also going to tighten up deviations from business plans. Currently, the FDIC requires prior written notice of any material deviations from the approved business plan during the first three years of a de novo bank's existence. In the future, prior approval of the FDIC will be required for any material deviation from or change to the business plan during the first seven years. Currently, a de novo bank has to provide pro forma financial statements for its first three years of operation at the time its application is submitted. Going forward, such institutions will have to provide revised business plans and financial statements for years four through seven prior to the end of the third year of existence. Existing institutions that are less than three years old will have to submit such pro forma financial statements and business plans for years four through seven, and all existing institutions that are less than seven years old will be subject to the 12-month examination cycle through the seventh year.

The stated reason for this revised policy is the FDIC's contention that "troubled or failed de novo institutions have demonstrated" the following "common elements during the first seven years of operation:"

• rapid growth

• over-reliance on volatile funding, including brokered deposits

• concentrations without compensatory management controls

• significant deviations from approved business plans

• noncompliance with conditions in the deposit insurance orders

• weak risk management practices

• unseasoned loan portfolios, which masked potential deterioration during an economic downturn

• weak compliance management systems leading to significant consumer protection problems

• involvement in certain third-party relationships with little or no oversight

The fact that the FDIC is not granting many, if any, new FDIC insurance applications to any applicants for a de novo institution, (notwithstanding the FDIC's denial of the existence of an informal new charter "moratorium") makes the new policy of more immediate interest to people other than those cock-eyed optimists who still hope to start a brand new community bank from scratch in these most difficult of times. For example, those private equity players who may decide that they can live with the most recent policy statement of the FDIC issued last Wednesday regarding the purchase of deposits and assets of failed institutions from the FDIC by private equity investors ought to take note. If those private equity players aren't already owners of an FDIC-insured bank or thrift, they should expect these these new policies to apply to any de novo charter they use to "get in the game," even a shelf charter. In addition, I would not be surprised if the policies embodied in FIL-50-2009 are extended to types of charters other than the state, non-member bank charter that is technicaally covered by the policy statement. If the FDIC's rationale for the adoption of the latest policy is correct, there is no reason that the policy should not extend to de novo FRB-member, state-chartered banks, as well as to national banks and federal savings banks. Also, I would not drop in my tracks with shock if some or all of the restrictions embodied in this policy are eventually applied in situations where acquirers from outside of the banking system apply to acquire control of an FDIC-insured institution and the FDIC (and/or other federal regulator) has "concerns" about how well the acquirer will "oversee" the institution after the acquisition is completed.

There's absolutely no doubt that starting a new bank has gone from very difficult to extremely difficult. Of course, if you've got scads of money and plenty of time, there will be no shortage of "experts" who will tell a potential organizing group or acquirer, "Well, it will be difficult, expensive and time-consuming, but we think we can get it done."

CRA Extension: Let's Focus On The Real Issues

We're waiting on pins and needles for the details of the next great idea for disposing of toxic assets on the balance sheets of big banks by enticing private investors to participate in working out those assets with a government whose word is no bond, and which blows with the prevailing winds. Let's hope the buyers get their money up front, then move to a country with no extradition treaty with the U.S. Otherwise, when Congress and/or the American people decide the deal was too good for private equity, they'll change it or punitively tax it retroactively

While we squirm with anticipation, we can't help but notice that Texas Rep. Eddie Bernice Johnson is pushing forward with a bill to extend the coverage of the Community Reinvestment Act to non-banks, such as credit unions and non-bank mortgage lenders. It's been something that liberal Democrats have been targeting for years, including Barney Frank. It's expected that Republican opponents will trot out the tired shibboleth that the CRA "caused" the subprime mortgage crisis. As we argued last December, that argument is simply not sustainable by anyone other than those who favor their Kool-Aid laced with cyanide. Even Sheila Bair and John Dugan agree on that point.

As The Washingtonn Independent noted last week, the Federal Reserve Board recently offered further support for our position.

Amid the ongoing debate over mortgage lending reform, a top federal regulator took a seat before Congress last week and debunked the myth — popular among conservatives — that a law encouraging loans to low-income communities has been largely responsible for the nation’s housing crisis.

“I can state very definitively,” Sandra Braunstein, director of the Federal Reserve’s consumer and community affairs division, said during a House Financial Institutions subcommitte hearing Wednesday, “that from the research we have done, the Community Reinvestment Act is not one of the causes of the current crisis.”

[...]

She cited a Federal Reserve Board analysis which found that, in 2006, CRA-covered banks operating in CRA-targeted neighborhoods accounted for just six percent of the risky, high-cost loans largely responsible for the housing crisis. Mortgage loans are considered high-cost when interest rates are at least three percentage points higher than those of conventional mortgages.

“So I can tell you,” Braunstein said, “if that’s where you’re going, that CRA was not the cause of this loan crisis.”

[...]

“Our analysis of the data finds no evidence, in fact, that CRA lending is in any way responsible for the current crisis,” Fed board member Elizabeth Duke said in a speech before representatives of the banking industry last month. “The CRA is designed to promote lending in low- to moderate-income areas; it is not designed to encourage high-risk lending or poor underwriting.”

Advocates are quick to point out that the CRA includes a safety and soundness provision that discourages bad loans. “It has a built-in check saying that [banks] have to lend in a way that’s good for the institution and good for the community,” said Danna Fisher, legislative director at the National Low Income Housing Coalition.

Of legitimate concern to banks, however, is that Johnson's bill would require regulators to determine whether lenders are adequately serving all minorities, not merely low income communities, as is the case under the existing CRA. The addition of new criteria will give extortionists consumer advocacy groups more ammunition to extract money concessions from banks that want to merge, acquire another institution, or branch. One more layer of cost of regulatory compliance at a time when pressures on banks' bottom lines are greater than ever. The fight should be over whether this extension of federal law is necessary in light of its costs, and the battle ought to be waged on statistical evidence, not on ideological cant.

There's plenty of fodder to feed a "healthy debate" about the extension of CRA to new areas and covered lenders. Raising straw men won't give credibility to the law's opponents.

Misdirected Criticism Of CRA

In yet another sign of the Apocalypse, Sheila Bair and I agree on something. Last Thursday, speaking before a consumer advocacy group (her favorite turf, other than any Congressional subcommittee chaired by Barney Frank), Ms. Bair "vigorously" refuted the allegation that the Community Reinvestment Act was a cause of the explosion of subprime mortgage loans that led to the current credit crisis and economic meltdown.

"Point in fact," she said, "only one in four higher-priced first mortgage loans were made by CRA-covered banks during the hey-day years of subprime mortgage lending.  The rest were made by private independent mortgage companies and large bank affiliates not covered by CRA rules."

And "Let me ask you," she proceeded. "Where in the CRA does it say to make loans to people who can’t afford to repay? Nowhere." The facts are simple, Bair said. The lending practices that are causing problems today were driven by a desire for more market share and revenue growth, not because the government encouraged certain lending practices.

Some conservative pundits and "intellectuals" have been promoting the idea that CRA "forced" lenders to make such loans.

Mark Hillman, a former majority leader in the Colorado state Senate tells a different tale. "Through CRA, banks were strong-armed to make risky loans and threatened with fines of up to $500,000 per violation if they didn’t reach government quotas," he wrote in an op-ed published in late October. "Banks were encouraged to hire 'community groups,' like ACORN, to find 'qualified' borrowers."

Bair said CRA has always recognized there are limitations on the potential volume of lending in lower-income areas due to "safety and soundness" considerations, and that’s why the CRA never set out lending targets or goals. However, the CRA isn’t without imperfections, and now is the time to put more emphasis on the qualitative aspects of lending in CRA examinations, she said.

OCC Comptroller John Dugan, who, unlike Ms. Bair, considers himself more of a bank regulator than a consumer advocate, made similar points in a speech last month. I tend to take Dugan more seriously than Bair on these issues, because he's got less of a pro-consumer, anti-bank bias and isn't so obviously angling to curry favor with Barney Frank and the incoming Obama administration.

I find the argument that the CRA caused, or even substantially contributed to, the subprime mortgage crisis to be not only unconvincing, but counterproductive to any movement to "correct" the real abuses of the CRA. I was an in-house counsel for a large thrift institution when the CRA was enacted, and had primary responsibility for considering its impact on the operations of the thrift. One of the expected impacts was that consumer advocacy groups would use it to hold branch and merger and acquisition applications hostage by unjustifiably challenging those applications until the applicant "paid off" the advocacy group with a "contribution" to some housing-related fund or project of the group. That expectation was shown to be justified.

That said, the CRA did not "require" a bank to abandon sound underwriting requirements and make loams to borrowers who had no hope of repaying the loans. I served on a loan committee during the first four years of the CRA's existence, and I can testify that such a consideration was never raised. As to the application of the CRA in the decade of 1995 to 2005, a period singled out by critics for much of the CRA "abuse," I've polled many compliance officers of commercial banks and thrifts on this contention, and every single one of them scoffed at the notion. Not that university professors and political ideologues with absolutely no experience in mortgage lending or consumer lending will be deterred by the views of those who have actually served in the trenches. Still, non-Kool-Aid drinkers might take note.

There's enough to dislike in the CRA, and there are sufficient legitimate reasons to seek to reform it, without raising bogus "problems" that do no more than rally supporters and discredit opponents. When you make Sheila Bair look like a disinterested observer, you're not doing yourself any favors.

Speading the Joy

According to today's American Banker (paid subscription required), Barney Frank addressed the National Association of Federal Credit Unions and gave them the good news and the bad news. The good news was that he supported reform legislation being pushed by credit unions (the Credit Union Regulatory Improvements Act) that would raise the cap on business lending to 20% of a credit union's assets, from 12.25%, and would let any credit union, regardless of charter type, add underserved areas to its field of membership, increase lending investment limits, and ease restrictions on mergers and conversions. The bad news was that he intends that credit unions be subject to the Community Reinvestment Act.

"The principle that every financial institution has some responsibility to its community is where we start," he said. "How that is enforced is flexible … . I do not think that what we come up with will be any added burden for most of the credit unions."

No, of course not Barn. No more burdensome for credit unions than it is for banks and thrifts, who find CRA a pleasant exercise along the lines of dealing with loan sharks who threaten to break your kneecaps if you don't pay the "vig" on time and with the demands of terrorists who claim that they will execute one bank employee for every hour that you do not supply them with $1 billion (US) in unmarked bills and a Gulfstream V stocked with Tattingers, Dewar's, and 5 blond hookers with "large American breasts."

I recall a bank acquisition in the 1980s on which I worked while living in a Rocky Mountain metropolis. I worked for the buyer, which we'll call "Gonzo Bank," in honor of the late, great inventor of Gonzo Journalism, Aspen resident, and consumer of mass quantities of Mescaline, Hunter S. Thompson. Gonzo Bank was bushwhacked by a "community activist organization" we'll call SCUM (Society to Cut Up Money). SCUM called the local press, then held a noisy "rally" (i.e., riot) inside the bank's lobby at its downtown headquarters. They chanted slogans regarding the bank's failure to support inner city housing, and railed to the press and the cameras that there was no way a bank with such a poor CRA record should be allowed to acquire another financial institution, notwithstanding the fact that the bank had received a "satisfactory" CRA rating from its primary federal regulator. In a counterstrike of sheer brilliance, the bank agreed to contribute six figures to SCUM and to a fund for inner city housing administered by SCUM. SCUM's objections magically melted away.

Yes, credit unions need a taste of the third world thug-o-cratic tactics that only federal "do-good" legislation, enforced by the ruling classes of the "professionally aggrieved," are able to inflict. If banks and thrifts have to put up with this, there's no reason that credit unions shouldn't, especially if they're going to get all those juicy reforms that will make it difficult to tell a  bank from a credit union except when you're discussing net income "before taxes" and "after taxes."

Father Knows Best

Personal Finance Columnist Pamela Yip of The Dallas Morning News recently talked to Matt Fellowes, a scholar at the liberal "think tank" Brookings Institution, and discovered something quite amazing: liberals think poor people have too much access to credit.

It used to be that low-income consumers didn't stand a chance of getting a loan.

But today, lenders aggressively court this market with subprime mortgages and payday loans.

"It's a boom market," said Matt Fellowes, a scholar at the Brookings Institution, a liberal think tank, who recently completed a study on lending to low-income consumers. "Where 40 years ago lenders were being accused of redlining lower-income markets, now they are awash in credit. In fact, families in the bottom half of the income distribution have been the fastest-growing part of the credit market over the past 20 years."

But have we gone too far in extending credit to low-income consumers – especially those who don't have much wiggle room if the slightest hiccup throws off their finances?

Definitely, according to Mr. Fellowes. The trouble is, federal policy is stuck in the 1960s, when credit was difficult to get, he said.

"Federal policymakers need to get their foot off the gas pedal in promoting access to credit and start addressing the hard reality that millions of Americans now have too much access to credit," he said.

Let that one sit there and settle for a minute. Aw, to heck with that! Let's just keep skipping down the yellow brick road!

More than 55 percent of lower-income households held debt in 2004, up from 50 percent in 1989, Mr. Fellowes said.

"Total debt held by these households increased by 308 percent during this period, now adding up to over $481 billion," he said. "Nearly all of this debt is for mortgages and home-related installment trades."

Not surprisingly, Mr. Fellowes said, more than 32 percent of lower-income borrowers struggle to pay bills on time, and about 27 percent spend more than 40 percent of their income servicing debt.

"Congress can't just regulate its way out of this problem," Mr. Fellowes said. "There are deep, systemic problems with America's understanding of how to manage money effectively."

I had to re-read this several times before I was able to convince myself that I wasn't having an LSD flashback (which was odd, since I've never done LSD). A liberal intellectual proposes not only that poor people have too much access to credit, but also that this is a problem that big government can't solve by passing a law to kiss the booboo and make it all better. What's next, James Carville appearing on CNN and defending Don Imus?

So what does Mr. Fellowes propose, other than turning off the spigot to easy credit? That's already happening, thanks to bank regulators' "guidance," hearings and press conferences by politicos threatening legislative crackdowns, and, curiously, by the free marketplace going all Darwinian on certain of its weaker participants. Strangely, Mr. Fellowes calls not for bank lawyers (usually the perfect accessory with any outfit) but rather for another band of superheroes: "financial intermediaries."

Mr. Fellowes says what's lacking is an "intermediary," such as a financial planner, who would stand between "lenders and borrowers today in low-income markets – someone who basically can take all the options that families have today and evaluate what those different options are and what would make the most sense."

The concept is good, but I don't know many low-income consumers who can afford a financial planner.

Neither do I, Pamela, unless you pluck the planners from the ranks of roadside warriors holding cardboard signs saying "Will Plan For Food." A person who can't afford to pay the mortgage or a credit card is going to pay a "financial planner"?

But, you have to get up darn early in the morning to catch this fellow Fellowes without a ready answer.

One thing Congress could do is to give employers incentives to offer financial planning services at their workplace.

Companies already offer this to top executives, and many bring in financial advisers to help workers plan for retirement, Mr. Fellowes said.

Yes, well, due to the outrageous disparity in income between top executives and the average worker, top executives actually have assets and income that require planning, while the average worker considers himself lucky to be able to answer in the affirmative when he's asked, "You want fries with that?"

Ms. Yip doesn't get the "yips" under pressure. She's got a suggestion of her own.

I'd add another source: counselors from Consumer Credit Counseling Service agencies, which offer basic money management courses.

I assume that those agencies also charge a fee, however. Again, will the needy pay for the help?

James Ballentine of the American Bankers Association has the final word on the difficulty of trying to counsel people on the use of credit when they simply don't have the financial resources to pay back what they borrow.

The challenge is talking about prudent use of credit to those workers who are already living hand-to-mouth and going into debt, Mr. Ballentine said.

"It's a particularly difficult conversation when you're talking about low-income communities, because they're living paycheck to paycheck."

We've come a long way when folks on the left scream that lenders are too liberal in making credit available to poor people. Whether the distance we've come has been in the right direction, I'm not certain.

Expect this type of analysis to be used to support legislative "remedies" like the "suitability" standard proposed by (Up)Chuck Schumer and Barney Frank and the mandatory credit counseling legislation in Texas that we recently discussed.

On the other hand, banks should bring this theory to the attention of the bank regulators whenever possible. "Get your foot off the gas pedal and off my back, OCC." "What decade are you living in, FDIC, the 1960s?" "CRA? We don't need no stinkin' CRA!" "How many loans did I make in Cook County last year? Haven't you read the latest Brookings report? Those folks in Cook County have got WAY too much credit as it is!"

I know: I'm a glass-half-full kind of guy.