Putting Financial Literacy Back Into The CRA Process

Written by Phil Hall
on June 14, 2010 No Comments
Categories : Blog View

[u]BLOG VIEW:[/u][/i] After my column last week that questioned whether recent surveys on low to nonexistent savings by consumers and inadequate financial literacy by twentysomethings would prove to be a harbinger of a future crisis, I received an e-mail from Mike Townsend, vice president and residential mortgage manager at The Bank of Holland in Holland, Mich.[/b] Townsend noted, ‘I have been in the mortgage industry for over 25 years, and at no time has this issue been more critical than now. I run the mortgage department of a small Michigan bank and spend much of my time 'educating' borrowers on financial matters.’ Townsend also pointed to a recent MortgageOrb article relating to whether the Community Reinvestment Act (CRA) needs to be updated. Townsend wrote to me, ‘One possible idea that has come to me is to combine this need for greater education and the relevancy of CRA. Reading the article on the struggles with what to do with CRA, I wonder if there is a way to connect those dots. Banks are in a wonderful position to educate the public on how to budget, save and borrow. Why could this not become a factor in CRA?’ In concept, financial literacy is a factor in the CRA compliance process: Financial institutions that offer school-based bank savings programs and/or the Federal Deposit Insurance Corp.'s Money Smart program within their business territories can receive positive consideration during the examination process. In practice, however, things are different. Townsend is correct in asking why this isn't a factor within today's wider CRA process – and, for that matter, why it wasn't emphasized in the course of the previous decade, when financial ignorance seemed to be the prevailing condition. Most people within the financial services industry will admit that CRA is in desperate need of an overhaul. Part of the problem is the nature of the law, but most of the current difficulties can be traced to how the law was recklessly leveraged to produce artificial results that made for excellent political results but questionable economic gains. If the current dismal state of consumer savings levels and the lack of financial literacy are any indication, this aspect of CRA was neither pursued nor enforced with any great seriousness. On the other hand, CRA puts a disproportionate onus on the nation's banks. Non-depository institutions are not subject to CRA provisions, and numerous studies have found that financial services companies operating under CRA requirements did not originate the majority of toxic subprime loans. And let's not forget the predatory payday lenders that operate without any regulatory supervision in the low- and moderate-income neighborhoods that CRA was designed to help. Of course, there is no movement to expand CRA to include non-depository lenders, which seems to lead us back to where we started – unless, of course, the proposed consumer financial protection entity being hammered out in the federal regulatory reform legislation puts a new emphasis on financial literacy as part of the lending process. This could be a potential wild card – we have no clue where this agency is going to focus or what its goals are going to be. There is the risk it will be another status quo favoring bureaucracy that uses housing as a political tool. But there is also the possibility that it might actually try to bring reason and focus to the ongoing state of federal disorder. Ultimately, the federal government and the wider financial services industry will need to seriously address financial literacy, the lack of adequate savings by many Americans and the problems in CRA. Whether these issues are addressed separately or in unison, they cannot be ignored anymore. [b]On a side note: [/b]MortgageOrb is now on Facebook. If you have a Facebook account, please connect with us [link=http://bit.ly/dwLhHe]at this link.[/link] – Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b] [i] (Please address all comments regarding this opinion column to hallp@sme-online.co

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