Our partner in the USA the National Community Reinvestment Coalition with whom we intentionally share the abbreviation CRC (Coalition for Responsible Credit) defends the rights of especially poor people in the USA to have fair, responsible and equal access to financial services. It was once born out of misuse banks provided when redlining whole areas of cities in which they denied all investments and credit due to the assumption that lend in those places credit would be too risky. Senator Proxmire and Gale Cincotta who spoke at our 1996 Strasbourg conference on Banks and the Region are seen as the parents of one of the shortest laws of the US – the Community Reinvestment Act. John Taylor, head of NCRC is regarded as the "Father of CRA" given his successful effort to prevent the CRA from being repealed in 1992.
The CRA law requires all banks to affirmatively serve the credit needs of low and moderate income, credit-worthy borrowers, insuring that they have access to responsible credit and other banking services. The banking authorities/regulators assess the banks record of loaning to low and moderate income people. That assessment is published in what is known as the bank's "Public Evaluation" where the bank examiner details the success or failure of the bank in meeting the credit needs of low and moderate income residents. Further, the banking regulator issues a "CRA grade" that rates the banks overall CRA performance, issuing one of the four grades to that bank: Outstanding, Satisfactory, Needs to Improve and Substantial Non-Compliance. Following the CRA exam of the bank, the CRA grade and the regulator's evaluation is made public for the press and any other interested party to review. Depending on the CRA grade or rating, banks would have difficulties in getting the permissions necessary to open a new affiliate or to merge with another bank. Thus especially in the 1990s some banks had to postpone their mergers and make specific oral and/or written commitments to the regulators of their promise to improve their performance in serving low and moderate income borrowers.
Following the financial crisis, some conservatives attempted to lay blame on the CRA, alleging that the law forced lenders to make unsafe and unsound loans. However, the banking regulatory authorities dispelled this myth with several studies showing that CRA loans performed well or even better than the typical non-market loan (http://www.federalreserve.gov/pubs/bulletin/2013/pdf/2012_HMDA.pdf). They pointed out to those who would attempt to accuse CRA as the culprit that the mortgage companies which provided the subprime, unsustainable loans were not covered by CRA, or even the banking regulatory agencies. They were free to issue loans that were acquired by Wall Street Investment firms without any concern or thought about CRA. Conversely, banks that issued un-sustainable loans were quickly informed by the prudential banking regulatory agencies to cease such lending, thus the reason for very low default rates in CRA loans. CRA remains strong and has been enhanced by recent legislation, namely the Dodd-Frank Act which created a consumer protection agency, and greater transparency and accountability for all lenders.
Its long-time leader John Taylor wrote recently from Washington D.C. congratulating our English partners on the introduction of usury legislation:
“NCRC is doing very well, with over 29 cases filed against banks with the federal government alleging discriminatory lending practices. We are also knee deep in trying to influence the US system of housing finance and securitization. Conservatives in the US have attempted to blame CRA and the affordable housing goals of Fannie Mae and Freddie Mac. [the publicly controlled companies for the refinancing of housing loans (iff)] Fortunately facts have prevented this fairy tale from taking hold. But still, legislators assume poor people, just because they're poor are greater risks. NCRC has been trying to disabuse them of this belief and make sure that whatever securitization system exists in the US in the coming years, includes working poor and moderate income households. I was recently invited by a minister in Parliament to attend a series of workshops in the UK to discuss CRA, but they seemed more focused on CDFIs as a solution and I thought the folks they had coming from the US were sufficient to carry that message, or declined.”
The problem of discrimination of the poor is well known in all other banking societies of the world. In Europe we call it “risk-based pricing” where poor people, perversely just because they are poor, have to pay higher interest rates. The banks who apply this methodology do not even claim that all of them are a high risk. They think it is sufficient to state that among them a higher proportion than the average will fail. So those say 80% of poor people who never fail and who are good payers are taken hostage for poverty in society. It is a shame that the courts so proud of their principles of anti-discrimination and supported by wonderful civil rights charters and anti-discrimination laws and directives have failed to intervene until now believing that you can blame people for a problem only because they belong to a group in which the problem occurs statistically more often than in other groups. (I wait for such a survey on credit and debt with regard to the hair colour in Europe!)
There are numerous other ways to increase poverty which explain why the biggest problem, even of such a prosperous economy as the German one, has soared to 20% of society and even more with regard to children. The sharks of overindebtedness are the debt collection systems in which irresponsible financial institutions cooperate with some big law firms and debt collection agencies. We have found cases in which only a few Euros of debt have been turned into a debt-load of a few thousand Euros within less than two years.
Payday loans in the UK are the most known form in that country to make poor people pay more when excluded from mainstream banking and turned over to the loan sharks like Providential. We thought that the European Continent had been immune to it since access to bank accounts was well protected and showed that also poor people could be clients. Since such bank accounts due to the use of plastic money had to provide an overdraft whose conditions were shared by all client rich and poor alike it was a wonderful way to provide short-term liquidity in a non-bureaucratic and affordable form. The EU Parliament pushed by countries like France and Belgium even proposed to make the right to access to a bank account a general goal. But meantime the banks had invented a system in the system. The poor who had to use credit facilities sometimes over the limit which had been tolerated before were now charged an extra 4 to 5% p.a. and sometime fees like 30 Euros a month. The neo-liberal Consumer Credit Directive 2008 acknowledged this kind of punitive default interest by calling it “overriding” as a new form of contractual credit where the interest rate was free from protective default legislation. The banks jumped into the loophole from Brussels and gradually increased overdraft interest rates and overriding interest rates to such an extent that in Germany the legislator is about to step in and provide new limits. But the EU-Parliament dominated by banking lobbyist and signs of ignorance as to the practical effects of their efforts now want to give access to bank accounts without an overdraft facility for the poor. The core element in banking discrimination in credit was thus ignored. Furthermore the law makers with their narrow right to a bank account have thus created a special banking product for the poor with all the stigmas one can imagine. Our intervention in the Parliament that the parliament is about to create a Ghetto economy was rejected with anger but they did not even want to inquire this problem. For Germany it has been proven by the Annual iff survey on 12000 overindebted households that the banks have started to push people who previously had normal bank accounts with overdraft into such ghetto accounts.
Anti-discrimination with regard to “The Poor Pay More”, title of the book of one of our spiritual fathers David Caplovitz, is the most important part of banking policies of today. Wherever this problem grows, predatory lending practices will grow, which again increases the amount of circulating bad debt in the form of securities which again will lead to the next “subprime crisis” which has shaken our economies and taken tax payers as hostages for such banking behaviour all over the world.
ECRC and NCRC are fighting together and hopefully will get this problem onto the world agenda where so many things seem to move but which move nothing. Helping to alleviate the poverty gap would make our economies strong as has been proven in South America and China. US and Europe cannot provide the necessary social cohesion to cope with the big problems of mankind (global warming, terrorism, natural catastrophes) if up to one third of society will no longer identify with it.
Udo Reifner |
