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Professor Lawrence White Testifies Before the House on Enhancing the Community Reinvestment Act

On September 16, 2009, Professor Lawrence White testified before the United States House of Representatives Committee on Financial Services during a hearing on “Proposals to Enhance the Community Reinvestment Act (CRA).” In the hearing, Professor White argued that the CRA is not a good public policy tool, described the act’s shortcomings and outlined a more effective way to achieve the goals of CRA advocates.

In the context of today’s lending industry, Professor White questioned the basis of the CRA:

  1. If loans are profitable, profit-seeking banks should already be making them – in this scenario, the CRA is redundant and causes regulatory compliance and enforcement costs.
  2. Why should a bank have a special obligation to lend to a specific local geographic area?
  3. Why place this special obligation on banks, as opposed to all types of lenders?
  4. When choosing a location, banks will be influenced by the associated regulatory burdens. This act may be counter-productive and discourage banks from establishing branches in low- and moderate-income areas.
  5. The ambiguity of the CRA’s language has led to vagueness and subjective enforcement.
Having described the CRA’s weaknesses, he proposed several alternative methods to achieving its goals:

  1. Racial or ethnic discrimination by lenders should be vigorously prosecuted under the Equal Credit Opportunity Act.
  2. Antitrust laws should be strictly enforced, maintaining competition in financial markets; if this is inadequate, then companies with a well-established business model of providing good value to low- and moderate-income consumers (e.g., Wal-Mart) should be encouraged (instead of forbidden) to enter banking.
  3. For valuable social endeavors that local lenders do not satisfy, loans and investments should be funded through the state treasury.
  4. If the CRA continues, its vague and subjective regulatory enforcement should be replaced by a set of specific, annual lending obligations that are tradable (similar to the cap-and-trade program that has been successful in dealing with SO2 emissions).
Read Prof. White's full testimony