#redlining

On Tuesday, the banking agencies will release the final version of their 679-page proposal to rewrite the Community Reinvestment Act.  Regrettably, much of the proposal reflected the worst of false-science staff seeking complex new models defining subjective goals combined with certainty-loving compliance officers and lawyers who just want to be told the number they need to hit, not if the number makes any sense.  Unsurprisingly, there were hundreds of comment letters in which banks generally said the agencies should ease up and community groups urged still more stringent standards.  But the story doesn’t end with this unremarkable line-up– in just the last few months, two major bank trade associations and one often-virulently anti-bank advocacy group agreed on one crucial thing:  anything close to what the agencies proposed won’t work.

There are of course sharp differences between what banks and public advocates want in a new CRA rule, but what unites them is the over-arching understanding that the new approach is a cumbersome exercise remote from the reality confronting both banks and borrowers in the least-served urban and rural communities.  Banks complain – often with good reason as I showed in my book on economic inequality – that risk-based capital rules over-estimate the risk of lending to many community-focused borrowers.  The new capital proposals would ameliorate some of this in their “enhanced” risk weightings, but these weightings actually don’t count for much of anything since the proposed “higher-of” standards applies current, higher weightings.

The agencies in fact acknowledge as much …