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Next Generation CRA: A 21 st Century Responsibility and Accountability Agenda for Consumer Financial Services Ellen Seidman Director, Financial Services.

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Presentation on theme: "Next Generation CRA: A 21 st Century Responsibility and Accountability Agenda for Consumer Financial Services Ellen Seidman Director, Financial Services."— Presentation transcript:

1 Next Generation CRA: A 21 st Century Responsibility and Accountability Agenda for Consumer Financial Services Ellen Seidman Director, Financial Services and Education Project New America Foundation October 24, 2007

2 The New America Foundation Nonprofit, post-partisan, public policy institute Nonprofit, post-partisan, public policy institute Launched in 1999, headquartered in Washington, DC with a significant presence in California Launched in 1999, headquartered in Washington, DC with a significant presence in California Invests in individuals and policy solutions that transcend the conventional political spectrum Invests in individuals and policy solutions that transcend the conventional political spectrum Sponsors a wide range of research, writing, conferences and public outreach on critical global and domestic issues Sponsors a wide range of research, writing, conferences and public outreach on critical global and domestic issues

3 Financial Services and Education Project A project of the Asset-Building Program A project of the Asset-Building Program Funded by the Ford Foundation Funded by the Ford Foundation Focus on federal and state policy for: Focus on federal and state policy for: Improving consumer access to quality financial servicesImproving consumer access to quality financial services Effective financial educationEffective financial education Getting debt right, so it builds, not destroys assetsGetting debt right, so it builds, not destroys assets Responsibility and accountability agenda for 21 st century consumer financial servicesResponsibility and accountability agenda for 21 st century consumer financial services

4 CRA Origins and Purpose Disinvestment in low-income, primarily urban communities Disinvestment in low-income, primarily urban communities White flight/Block bustingWhite flight/Block busting RedliningRedlining Whites in the next community hurt tooWhites in the next community hurt too Deposits coming in to institutions but credit not coming back out Deposits coming in to institutions but credit not coming back out Focus on access to credit Focus on access to credit

5 Context 18,000 banks and thrifts (vs. 8,600 now) 18,000 banks and thrifts (vs. 8,600 now) 80% of mortgages made by commercial banks and thrifts (vs. 43% in 2006) 80% of mortgages made by commercial banks and thrifts (vs. 43% in 2006) Mortgages were either prime or FHA/VA Mortgages were either prime or FHA/VA Consumer credit was the province of banks, thrifts, credit unions (auto), consumer finance companies (auto, short-term installment); no credit cards Consumer credit was the province of banks, thrifts, credit unions (auto), consumer finance companies (auto, short-term installment); no credit cards Savings were kept in savings accounts Savings were kept in savings accounts Securities industry served commercial and institutional interests and upper-income consumers Securities industry served commercial and institutional interests and upper-income consumers At least 20% of families had no checking account At least 20% of families had no checking account

6 How Has The Context Changed? In some ways, it hasnt; 2006 HMDA data confirm that low income (and minority) communities and families are still disadvantaged In some ways, it hasnt; 2006 HMDA data confirm that low income (and minority) communities and families are still disadvantaged But in many ways, it has: But in many ways, it has: New players, new rolesNew players, new roles Including community-based institutions Including community-based institutions New products (credit cards, sub-prime)New products (credit cards, sub-prime) New expectations (ubiquitous plastic)New expectations (ubiquitous plastic) New complexityNew complexity

7 CRA Learnings What is measured gets done What is measured gets done Public information is extremely powerful, when used to leverage regulatory authority Public information is extremely powerful, when used to leverage regulatory authority Not everything has to be a cease and desist order Not everything has to be a cease and desist order Mandates can spur innovation Mandates can spur innovation Partnerships are critical in entering and serving new markets Partnerships are critical in entering and serving new markets

8 CRA Concerns Applies only to banks and thrifts Applies only to banks and thrifts Complexity Complexity In general, focus on inputs rather than outcomes In general, focus on inputs rather than outcomes Bean counting Bean counting Spatial focus Spatial focus Inconsistent with new business models, funding streamsInconsistent with new business models, funding streams Color blindColor blind People as important as placePeople as important as place Too much in NYC, Delaware, SLC; too little in rural areas, smaller citiesToo much in NYC, Delaware, SLC; too little in rural areas, smaller cities Need for more powerful positive incentives Need for more powerful positive incentives Options dont work very well Options dont work very well

9 Some Conclusions Broadly directive, non-prescriptive statute is long-lasting Broadly directive, non-prescriptive statute is long-lasting Uniformity of responsibility for entities providing similar products is important, but it is not clear that requires identical enforcement methodology Uniformity of responsibility for entities providing similar products is important, but it is not clear that requires identical enforcement methodology Technology enhances feasibility of broader public disclosure Technology enhances feasibility of broader public disclosure But public and media cant do it all; regulatory role is essential But public and media cant do it all; regulatory role is essential Clear, measurable standards are valuable, but need to measure the right things Clear, measurable standards are valuable, but need to measure the right things Community based organizations and partnerships are a critically important part of the system Community based organizations and partnerships are a critically important part of the system

10 A Paradigm For Consumer Financial Services Any financial institution that provides an essential consumer product must make that product available in a fair and transparent manner to low and moderate income consumers in all communities in all broad geographies in which the entity does more than an incidental amount of business in the product. Any financial institution that provides an essential consumer product must make that product available in a fair and transparent manner to low and moderate income consumers in all communities in all broad geographies in which the entity does more than an incidental amount of business in the product.

11 Underlying Principles Fairness Fairness Essential consumer financial services meet the needs and desires of lower- and middle-income people and placesEssential consumer financial services meet the needs and desires of lower- and middle-income people and places Essential consumer financial services are offered at equitable prices and terms, based on cost and an accurate assessment of riskEssential consumer financial services are offered at equitable prices and terms, based on cost and an accurate assessment of risk Analysis of profitability is done on terms no less favorable for lower- and middle-income consumersAnalysis of profitability is done on terms no less favorable for lower- and middle-income consumers Principals are responsible for acts of agentsPrincipals are responsible for acts of agents Transparency Transparency Potential customers receive timely and accurate information about product terms and risksPotential customers receive timely and accurate information about product terms and risks Information about manner in which essential consumer products are provided is made available to the public in a timely manner, in sufficient quality and quantity to enable outside evaluation of whether a firm is meeting its obligationsInformation about manner in which essential consumer products are provided is made available to the public in a timely manner, in sufficient quality and quantity to enable outside evaluation of whether a firm is meeting its obligations

12 Essential Consumer Products Transactions Transactions Converting revenue to paymentConverting revenue to payment Timely and secure payment methodTimely and secure payment method Credit Credit Small-dollarSmall-dollar AutoAuto HomeHome Post-secondary educationPost-secondary education Savings and investment Savings and investment Short-termShort-term Longer-term, low-riskLonger-term, low-risk Tax-advantagedTax-advantaged Insurance Insurance AutoAuto HomeHome

13 The Concept in the Banking Context Cover all broad geographies in which a significant amount of business is done in the relevant product Cover all broad geographies in which a significant amount of business is done in the relevant product HMDA-like regimes for other essential consumer products HMDA-like regimes for other essential consumer products All members of H/C family that provide essential consumer products evaluated together All members of H/C family that provide essential consumer products evaluated together Enhanced consumer protections fully integrated into evaluations Enhanced consumer protections fully integrated into evaluations Public evaluations more friendly to analysis Public evaluations more friendly to analysis

14 How to Cover Others? Use Federal Reserve, HUD to collect and disseminate data? Use Federal Reserve, HUD to collect and disseminate data? Strengthen FTC? Strengthen FTC? Strengthen State regulators? Strengthen State regulators? Replicate CRA in other regimes? Replicate CRA in other regimes? Credit unionsCredit unions Build on strengths of other regimes? Build on strengths of other regimes? Suitability standards in securities regulationSuitability standards in securities regulation Consumer pricing/product regulation in insuranceConsumer pricing/product regulation in insurance

15 Transitions Start with products that are riskiest for consumers, and their providers? Start with products that are riskiest for consumers, and their providers? MortgagesMortgages Credit cardsCredit cards Start with products that are not broadly available at good prices/terms? Start with products that are not broadly available at good prices/terms? Transaction productsTransaction products Start with most similar regulatory regime? Start with most similar regulatory regime? Credit unionsCredit unions


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