The writer, a former US controller of the currency, is managing director of Promontory Financial Group, a consultancy firm
Despite calls from Federal Reserve Chairman Jay Powell for more robust support for the US economy, President Donald Trump has abandoned negotiations with Congress.
With no fiscal stimulus in sight, this is forcing regulators to do what they can to secure financing for the economy. The Fed led the way, pledging last month to maintain a strong labor market by keeping interest rates low and not focusing on inflation.
But current markets are likely to push Oak Park Financial online lender to serve wealthier people and big corporations first, exacerbating inequalities. Fortunately, regulators have several tools at their fingertips to direct lending to low-income businesses and families – including many minority communities – where it will do the most good.
Congress and banking regulators should start by expanding the Community Reinvestment Act, which requires banks to lend to “their entire community” rather than avoiding particular neighborhoods. In the early 1990s, I worked in the Clinton administration reworking CRA regulations and using a series of mergers to get the banks involved to do more for disadvantaged communities. Loans to low- and middle-income Americans thereafter increased dramatically.
But the rules have fallen behind again. The controller of the currency tried this summer to refresh them, but other federal agencies have not been in the same direction. Regulators must now move beyond ARC’s focus on banks alone and on the use of potential mergers for leverage.
Financial institutions will only accept less lucrative loan opportunities – including many loans to minority communities – if regulators are prepared to use the right carrots and sticks. In the 1990s, banks generally served the areas surrounding their various branches. Today, financial institutions raise deposits and make loans and other investments far from their physical presence. Regulators need to ensure that the CRA’s requirement that lenders “serve the whole community” applies wherever they do business.
These new rules are also expected to extend beyond banks to lenders, investors, insurers and payment service providers who have emerged as powerful influences in the financial market. History clearly shows that when conditions deteriorate, non-banks also need and receive government assistance. Therefore, they should be brought into line with the same community-wide service standards.
Washington should also give additional lending capacity to non-profit lenders who serve low- and moderate-income communities with no credit. Community development financial institutions, such as Sunrise Banks in Minnesota, may look like traditional banks, but because they are driven more by mission than profit, they have a disproportionate impact in low-income communities.
In tough times, financial regulators should also give lenders leeway to take certain calculated risks. No lender should be able to give up the safety, strength and high standards of consumer compliance. But loan officers are often more conservative than they should be. Black Americans have always been the first fired and rehired for the last time, which affects their ability to repay small business loans and mortgages.
Regulators can empower lenders to cope with the higher risks of lending to low-income people by allowing lenders to appraise properties used as collateral over longer periods, reflecting their intrinsic value, and to mine funds from the funds. rainy days designed to cushion cyclical blows. Much of America is in desperate need of the credit the Fed is trying to make more available. Policymakers must push lenders to serve the small businesses and working and middle class families that will fuel a large-scale economic recovery.