It more often than not really does pay to read the fine print. Case in point: what new progressive legislation does to the Community Reinvestment Act (CRA). As we show in our in-depth analysis, Sen. Warren and her Congressional colleagues didn’t stop with their headline proposal to rope nonbank mortgage companies into the controversial Act. They in fact rewrite the 1977 law in almost its entirety to make covered financial companies instruments of a wide-ranging social-welfare and equity agenda. This is “stakeholder capitalism” far beyond the earnest promises endorsed by those financial companies who espouse this new vision. Like it or not, it’s a fundamental rewrite of every bank’s charter and, for nonbanks, also a transformation of their basic business.
Will this bill pass as is? No. Will parts of it get folded into the infrastructure behemoth or other measures? Almost surely. And, even if the CRA rewrite isn’t enacted into law, much of it could be implemented by rule after more progressive regulators take charge at the OCC and, later, the FDIC and Fed. Thus, anyone who dismisses these sections in the Warren bill as a fringe effort could be in for a rude surprise.
And, there’s more that could move via legislation or, in good part, even via like-minded regulators. As our in-depth report also details, CRA isn’t the only law eviscerated by the progressive proposal. The measure also redefines how lenders, servicers, the FHA, and GSEs are to handle borrowers facing foreclosure, their non-performing loans (NPLs), and the houses they leave behind.
At its root, these provisions change who’s on the hook when a mortgage is made from the borrower to the lender, servicer, insurer, or guarantor. They must provide so many chances for loan modification that full P&I recovery is doomed from all but the most conscientious of borrowers. The bill would also force holders of NPLs and foreclosed homes or multi-family properties to dispose of these assets not at maximum return, but for the greater public good.
At the root of these two provisions is the firm belief that financial companies on their own are just no darn good even though public backstops warrant demands that these companies secure public welfare. The damage done to vulnerable borrowers and communities in the last financial crisis may warrant more than rebuke, but nationalization is not a recipe for revitalization. One need look no farther than the Fed’s payment system to see how slow, inefficient, and inequitable a federally-owned financial utility can prove.