To Lend or Not to Lend: What the CRA Ought to Say about Sub-Prime and Predatory Lending

Policies that support the expansion of affordable housing for low- and moderate-income persons must be reconciled with those policies that undercut the sustainability of home ownership. The sub-prime market represents a much needed expansion of credit markets to those who have been denied access to credit though they are creditworthy. The high failure rate of the sub-prime market indicates that market forces are ineffective in halting this economic abuse. This article argues that the public policy choices and justifications for certain practices have marginalized the concerns of particular consumer classes. It challenges the premise that the free market can and should operate without interference and critiques it from the a utilitarian perspective using home-equity lending as an example. It endorses the need for diversified financial services industry but argues that predatory lending, which is the result of market information failure, does not fulfill this objective and in fact leads to an onerous type of borrower market segmentation. The capital supply of predatory lenders is critical to eliminating the sharp practices presently sanctioned by law. Proposing a duty on the originating lender to conduct a due diligence analysis, the article suggests that closer adherence to the rules of commercial negotiation would place more scrutiny on both the funding of predatory lenders by the primary market and the selling of predatory loans on the secondary market

ADVANCING THE CRA—USING THE CRA\u27S STRATEGIC PLAN OPTION TO PROMOTE COMMUNITY INCLUSION: THE CRA AND COMMUNITY INCLUSION

Banks, banking regulators, and community organizations have spent nearly thirty years interpreting and re-interpreting the simple but ambiguous mandate of the Community Reinvestment Act (CRA). The statute imposes an affirmative duty requiring regulated financial institutions to have continuing... obligations to help meet the credit needs of the local communities in which they are chartered. The CRA was met with much resistance and lax enforcement for almost a decade. Active protest from community groups, a more defined CRA exam, and innovative, profitable lending strategies, have resulted in a dramatic increase in community reinvestment dollar commitments and in loans to low- and moderate-income (LMI) and minority households. Banks have accepted reinvestment as a means of meeting the convenience and credit needs of communities and preventing urban deterioration. Yet, implementation and enforcement of the CRA remain problematic. The increase in lending has created another trouble - less vigorous and less qualitative enforcement. In an era of potentially lessened accountability due to almost laissez-faire enforcement, the CRA can benefit from increased use of regulatory enforcement powers and from more standardized performance reports. The CRA is designed to make lending institutions more accountable to the communities they affect. By definition, accountability requires banks to have some input from constituent communities. Measuring the CRA\u27s efficacy according to outcome - that is, the real improvement of physical infrastructures, maintenance of social and economic stability, and the actual influx of credit and investment capital into communities - is desirable. The dilemma presented when balancing community participation and inclusiveness while preserving as much autonomy as possible for financial institutions is the subject of this article. Part I discusses the CRA\u27s explicit and implicit objectives. Part II discusses the CRA\u27s evaluative tools: the traditional three-part test and the strategic CRA plan. The three-part test measures a bank\u27s actual performance in service, investment, and lending. As an optional way to comply with the CRA, the strategic CRA plan envisions that lenders will seek community input in setting five-year CRA objectives. The strategic plan brings to the forefront the conflict and pressure that banks experience when community groups organize to halt an institution\u27s merger or expansion plans based on past CRA performance. Part III discusses the potential pitfalls that can be produced by the CRA\u27s obligations. Such obligations, if not carefully crafted, could limit the flow of capital into communities even from banks that are willing to reinvest. Efforts to increase capital must be paired with sensitivity to a community\u27s redevelopment concerns. Vocal communities that are able to determine their sustainable economic need must have the opportunity to participate meaningfully in the funding process. The conflict between allowing communities to participate in shaping the bank\u27s funding commitments and requiring a bank to pledge its financial support in advance is discussed in Part III. Part IV discusses the definition and role of community participation and outlines various ways that communities can be better included in a bank\u27s reinvestment process. The section concludes with a suggestion of factors to use in evaluating the level of community participation and inclusiveness. Part V discusses the importance of the strategic plan option to community participation

Democratizing Credit: Examining the Structural Inequities of Subprime Lending

This Article critiques the current regime of mortgage lending, which favors economic subordination. Minorities and low-and moderate income persons, regardless of their creditworthiness, are receiving higher loan rates. This is due to three market phenomena- the dominance of sub-prime lenders in the market in which prime lenders are more restricted to lend, the segmentation of the market so that certain products are offered to certain consumers, and the liquidity of the secondary market, which encourages lenders to make loans that are easily sold, but which may be inappropriately and impermissibly priced. Only by incorporating some transparency into the process will the borrower be able to level the playing field with the lender who may be using inaccurate and even impermissible pricing strategies. Examining the lending phenomena and their impact on credit availability is critical to uncovering the structural inequities that are manifest presently. The solution is to mandate that fair lending laws require informed risk-based pricing. Meaningful disclosures to the borrower will validate the economic rationale that the borrower has entered voluntarily into the transaction and made an informed decision. Mandating disclosures would place some transparency in the lender\u27s pricing decisions and would guard against lender abuse. Moreover, a critical examination of the current lending structure reveals that it is reinforcing an inaccurate status quo: 1) that borrowers have legitimate risk factors and voluntarily enter into transactions when, in fact, borrowers are unaware that the lender has made a determination that may be inaccurately priced and 2) that borrowers are unaware that they are not at-risk consumers

Back to the Parent: Holding Company Liability for Subsidiary Banks — A Discussion of the Net Worth Maintenance Agreement, the Source of Strength Doctrine, and the Prompt Corrective Action Provision

Given the statutory goal of parental accountability, this Article focuses on a narrow issue: Whether parental guarantees are the most effective regulatory tool for shielding the federal deposit insurance fund from losses when insured banking subsidiaries that are members of a multibank holding company system are insolvent. This Article posits that a needed complement to parental guarantees is temporary substantive consolidation of a holding company\u27s affiliated banks. This would require the parent company to combine the assets of its banking siblings to facilitate the reorganization of a financially troubled subsidiary. Temporary enterprise consolidation is a necessary regulatory tool because it provides an early form of intracorporate funding from any healthy banking subsidiary that has contributed to the weakened capital status of the financially troubled banking subsidiary. Part II of this Article discusses inherent structural problems of the multibank holding company system. It shows how these unique situations become problematic when a banking subsidiary threatens failure. Part III discusses the traditional prereform parental guarantees - the FRB\u27s source of strength condition and the OTS\u27s net worth maintenance agreement. It concludes that both of these regulatory tools, which are essentially identical, have become disfavored by the regulatory agencies and the courts as enforcement methods. The source of strength condition is arguably beyond the statutory authority of the FRB. The implied net worth maintenance obligation often is unenforceable because it is overbroad and vague. Part IV briefly examines several of the inadequacies of the newest parental guarantee - the prompt corrective action provision. Part V serves as background for the use of temporary consolidation in the banking industry by discussing the FDIC\u27s methods of resolving failed financial institutions; it explains how interaffiliate lending and captive funding may generate large loan losses and thereby increase the costs of failures within a multibank system. Part VI recommends an alternative to the prompt corrective action provision: temporary consolidation of troubled or undercapitalized banking subsidiaries within a bank holding company system. This alternative addresses the public policy objective of protecting subsidiary banks and the insurance fund within the framework of the corporate law doctrine of limited liability

Funny Money: How Federal Education Funding Hurts Poor and Minority Students

Neither race nor class alone can predict educational achievement. However, in America, disparities in funding for education may be an impediment to educational opportunity for disadvantaged youth. At the crux of the Nation\u27s achievement gap among minority children is the question of the how states should allocate federal education funds, and how local school districts should use those monies. Educators have long recognized that the socioeconomic circumstances of many public school students present great educational challenges. Since 1965, Congress has authorized the use of federal funds by local school districts to remedy the achievement gap. Part I of this Article discusses the background and history of Title I, and reviews the debates surrounding the statute\u27s enactment. The Section ends by arguing that problems with the statute\u27s contorted history and weak initial implementation have contributed greatly to ineffective enforcement and inequitable funding outcomes. Part II discusses the appropriate role for federal government in local school funding. It describes federal funding for education as cooperative federalism, and argues that the federalist assertion that education is solely a local issue is mistaken by analyzing the characteristics and types of programs and funding historically and currently available for state and local education programs. Part II concludes by defining the role that federal government should play in eradicating improper funding allocations at the state and local level. Comparability is the most critical issue to examine if funding inequities are to be eradicated. Part III argues that there should be changes in both the ideology and the legislative schemes that encompass Title I. Specifically, Title I should be more “child-centered” and the funding formula should be keyed to the Title I child

Reconciling the Dormant Conflict: Crafting a Banking Exception to the Fraudulent Conveyance Provision of the Bankruptcy Code for Bank Holding Company Asset Transfers

Banking law and bankruptcy law clash. This is most evident when a bank holding company (parent company) becomes insolvent after it has made an asset transfer to its financially troubled bank subsidiary. The Bankruptcy Code (Code) governs the insolvency proceedings of the bank holding company. Predictably, the parent company\u27s trustee, appointed for the protection of all the creditors of the bankrupt entity, uses the fraudulent conveyance provision of the Code to have any asset transfers that were made to the bank subsidiary returned to the debtor\u27s estate. The good faith exception to that provision will protect the asset transfer only if the parent company made the transfer for “good and fair consideration.” The banking laws govern the regulation of the entire banking industry, including the insolvency of a financial institution. The banking laws, arguably, provide preferential treatment for the Federal Deposit Insurance Fund as a failed financial institution\u27s potentially largest unsecured creditor. Banking law allows the parent company to make an asset transfer to avoid the threat of mandated restrictions. It also gives an unfulfilled payment a priority status in bankruptcy. The rules do not state, however, under what circumstances an unfunded capital obligation ought to be allowed. The legality of the asset transfer when a parent company seeks bankruptcy protection is a crucial question for the banking industry. Part II of the article identifies the statutory basis for the dormant conflict between Titles 11 and 12. Specifically, this section lists the broad array of somewhat identical discretionary powers that both the bankruptcy court and the banking regulatory agencies have as trustee and receiver for insolvent corporations and financial institutions, respectively. Part II concludes with an analysis of the cases in which these discretionary powers of the trustee and the receiver have come into conflict. Part III discusses the bankruptcy of the Bank of New England Corporation (BNEC). The factual history of this case provides an example of the types of legal issues that an insolvent holding company faces under the banking laws when it files for protection under the Bankruptcy Code. The section ends by specifying post-BNE legislative reforms designed to address issues raised during the liquidation of that failed enterprise. Part IV identifies the statutory rights that creditors have under the fraudulent conveyance law, including the good faith exception. Finally, Part V proposes an amendment to the current regulatory scheme that would require asset transfers from an insolvent holding company. It posits that the policies supporting the good faith exception are not compromised by the concomitant goal of protecting the Federal Deposit Insurance Fund. The banking enterprise exception establishes a procedure for regulatory assets transfers that is reviewable by the bankruptcy court, and operates as a credit against cross-guarantee liability. The proposed change will more closely merge the policies and purposes of the two schemes that converge when a bank holding company becomes insolvent

Invisible Markets Netting Visible Results: When Sub-Prime Lending Becomes Predatory

In this article, I argue that Ellison\u27s metaphor of social invisibility—the societal undervaluing of minorities—is analogous to economic invisibility—the denial of fair access to credit to minorities. I then use the metaphor of invisibility as a basis for understanding the contemporary legal problem of predatory lending, or making credit available to borrowers at unreasonably high interest rates. Disguised as credit access to high-risk, underserved borrowers, predatory lending helps to create risk by offering borrowers products that do not adequately measure risk and that are not fairly priced