THE PLAIN DEALER Mortgage mess rooted in regulators’ desertion By Plain Dealer guect columnict on August 15, 2010 at 3:00 AM Ay Paul Bellamy (On Thursday, the Chicago Federal Reserve Bank hosted the third of four public hearings around the country about "modernizing the regulations" behind the Community Reinvestment Act (CRA). Iwas one of the many testifying, but | didn't talk about what the Feds wanted. They'd prefer to carry ‘on about fine points and technical adjust ments in order to ensure that the CRA "remains effective” and "meets the credit needs of communities.” ‘What these hearings should be addressing is how the four federal regulators ~ the Federal Reserve system's beard of governors, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision — abandoned enforcement of the CRA during the years long lead up to the current mortgage debacle. It was gross malfeasance and a see-no-evil complicity that supported the onslaught of renegade subprime lending. Ready compliance with industry agendas made regulators avoid the obvious: ‘Without rigorous CRA enforcement, the voracious and corrupting beast of subprime would devour us all, “The CRA was passed In the 1970s to prevent banks from “redlining” — refusing to make mortgage loans to those residents who ented up the bank's deposits. The intent was to serve low- and moderate-income neighborhoods, never a favored markat niche among our banker brethren. Pretty straightforward idea. And the Feds managed to applyit, albeit in fits and starts, until 1995. “Then it was forsaken by the banking regulators in favor of the mortgage industry's own, much-touted "Financial innovations." What financial innovations, you ask? A legion of predatory lending, liar loans, option ARMs, etc., all targeted to "serve" low-income, minority communities, of course. ‘And so the regulators caded the CRA's moral authority and turned this vaulted law nto a mere formality. ‘The outright neglect began in 1995, The CRA requires that banks and thnifts be evaluated on how well they serve the credit needs of areas from which they take deposits. The two lowest scores, "needs to improve" and "noncompliance," trigger legal action. In 1995, more than 200 banks nationwide fell into these categories. By 2005, that number had dropped by $3 percent, to fewer than 15. Without a negative CRa finding, banks can more easily acquire and merge with other banks. Until it stopped working, the CRA grading system allowed community groups to challenge bank mergers based on redlining and other discriminatory practices — a check and balance that made it more difficult, embarrassing and expensive for banks to neglect lower-income and minority markets. For evidence supporting these challenges, commurity groups relied on annual loan date gathered from banks and made public under the Home Mortgage Disclosure Act (HMDA). This powerful database gave advocates a tool to measure federally regulated banks’ mortgage lending by income, geography and race.Over time, these challenges fell on deaf ears. Regulators routinely dismissed community analyzed HMDA evidence a¢ unreliable, incomplete and misleading. Year after year, every approval of a challenged bank merger came with boilerplate language: "The [Federal Reserve Benk, Office of the Comptroller of the Currency, Office of Thrift Supervision or Federal Deposit Insurance Corp ] recognizes thet HMDA data alone provide only limited information about [CRA] covered loers." “The federal regulators systematically ignored the only tool community groups had to gauge bank misconduct ~ and made it impossible for the CRA to be enforced against transgressing banks. Mergers were elmost never denied by regulators and certainly not because of CRA concerns. But for those incined to see, the HMA data became increasingly stark and alarming, Subprime was con the rise. Banks were walking auay from their mortgage business in urban neighborhoeds, without -sccountabilty under the CRA. Subprime junk rushed into the eredit vaeuurn. So, what these hearings should ke about is why and how this happened. How did our rogulators become so utterly co-opted by the lending industry? How did banks, some now insolvert, repeatedly escape the wrath of the CRA? Why were low-income neighborhoods left to fend for themselves ‘against the mortgage predators? Fine-tuning CRA is all well and good, but it's not going to be worth a tinker's damn if the regulatory malfeasance of the last 15 years remains hidden behind opaque tech talk and fulsome, high-minded, speeches about what we ought to do going forward, It's time for an honest exploration of why a perfectly good law, that was and remains on the books, ceased to exist for those fragile communities at pracisely the time they needed it most. Bellamy is director of the Cuyahoga County Foreclosure Prevention Program and a longtime researcher and advocate around housing issues throughout Ohio. OFFER YOUR, OPINION Public hearings on how federal regulatory agencies assess financial institutions’ performance under the Community Reinvestment Act have been held in the Washington, 0.C, area, Atlanta and Chicago. ‘The fourth and final hearing is Tuesday in Los Angeles. Registration is now closed, but public ‘comments are being accepted until Aug. 31. For more information: www-ffiec.gov/cra/hearings.htm hitp:/ Awwu.cleveland.com/opinion/index.ssf/2010/08/mortgage mess rooted in regula html