Another nugget from the administration's plan to prevent a future financial crisis: Authority for enforcement of the unfairly maligned Community Reinvestment Act -- which is designed to prevent discrimination in lending -- will be moved to the the new Consumer Financial Protection Agency, which will have added resources to ensure the Act's standards are met. The official white paper notes the following:
Rigorous application of the Community Reinvestment Act (CRA) should be a core function of the CFPA. Some have attempted to blame the subprime meltdown and financial crisis on the CRA and have argued that the CRA must be weakened in order to restore financial stability. These claims and arguments are without any logical or evidentiary basis. It is not tenable that the CRA could suddenly have caused an explosion in bad subprime loans more than 25 years after its enactment. In fact, enforcement of CRA was weakened during the boom and the worst abuses were made by firms not covered by CRA. Moreover, the Federal Reserve has reported that only six percent of all the higher-priced loans were extended by the CRA-covered lenders to lower income borrowers or neighborhoods in the local areas that are the focus of CRA evaluations.
Good stuff. Paul Krugman is a fan of that idea and also, it seems, of the overall thrust of the package. Brookings Doug Eliot analyzes and sums up the emerging conventional wisdom: "The proposals are generally quite sensible. The unfortunate aspect is that political constraints have caused the administration to stop short of a full solution in certain areas, most notably in the consolidation of regulatory functions into fewer hands."
-- Tim Fernholz
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