The results of the financial “stress tests” conducted banking regulators offers about as clear a picture of the stability of the nation’s largest financial institutions as we are likely to get.  With the removal of at least a bit of uncertainty about the future of individual financial institutions, there is a real opportunity to turn public attention towards the future of the regulatory landscape for the financial services sector as whole.  Woodstock believes that this future should offer increased transparency, stronger accountability to public financial services needs, and a minimum safety standard for financial products.

To guide this process and make it more transparent, we need publicly accessible data on all financial products and services that affect our communities, similar to the disclosures currently mandated for banks under the Home Mortgage Disclosure Act.  Mortgage data provided a nearly (if often ignored) warning of the problems in the mortgage market. Expanding data disclosure to consumer loans and financial services would go a long way to avoiding a future crisis.  Our collective understanding of, and concerns about, future toxic products would also be well served by expanding data disclosure requirements to other types of firms, such as mortgage companies, insurance companies, consumer finance agencies, and others.

Equipped with this increased data disclosure regarding financial products and services, we must set new, higher standards of accountability by modernizing the Community Reinvestment Act (CRA). Since 1977, CRA has provided that financial institutions have an affirmative obligation to meet the credit needs of the entire community in which they accept deposits, including the credit needs of low-wealth consumers.  However, a large number of financial products are now offered by financial institutions that are not covered by CRA.  In fact, fewer than 6 percent of problem mortgages were made to low-wealth borrowers under CRA.  If we are to truly hold financial institutions accountable for meeting the credit needs of the communities they serve, we need to expand CRA to apply to 100 percent of the products and practices.  This would include mortgage companies, insurance companies, consumer finance agencies, and others.

But transparency and accountability will only get us so far.  We need a banking regulator whose sole purpose is to establish minimum safety standards for financial products.  This is different from establishing a minimum safety standard for institutions––the task assigned to the four existing federal bank regulators.   These minimum safety standards would help identify and effectively regulate products such as mortgages with exploding payment amounts, or long-term payday installment loans with triple digit interest rates, before they negatively impact the wider economy.  Illinois Senator Dick Durbin has introduced a bill to establish a Financial Products Safety Commission to establish just this type of regulator.   

Now that widespread fear of the wholesale insolvency of the nation’s largest banks has eased slightly, it is time to address the future stability of the financial sector as a whole.  We believe that transparency in the marketplace, accountability to the community, and minimum safety standards for financial products present the best prospects to ensure economic stability and prosperity.

Dory Rand

President, Woodstock Institute

published in the American Banker, May 22, 2009