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October 02, 2008
SRI Advocates Call for Help Against Foreclosures and Regulation of Wall Street
    by Robert Kropp

Responsible investors have led the fight against predatory lending for nearly 10 years with both successes and failures. Advocates see opportunity in current crisis to put end to practice. Last of a three-part series.


Plenty of blame can be passed around for the meltdown in US financial markets that occurred during the past weeks, from predatory mortgage brokers and Wall Street investment firms to rating agencies such as Moody's Investors Service and Standard & Poor’s that gave AAA ratings to risky mortgage securities.

"To say that the ratings agencies made financially imprudent decisions would be an understatement," declared Frank Rauscher, for ten years the President and Chief Executive Officer of Aquinas Investment Advisers and The Aquinas Funds, as well as a leading voice in matters of corporate governance for the Interfaith Center on Corporate Responsibility (ICCR).

Some free-market advocates blame the Community Reinvestment Act, enacted in 1977, for forcing banks to lend to lower-income borrowers in underserved communities. But as the New York-based law firm Traiger & Hinckley demonstrated in a 2008 report, "The CRA, which requires banks to help serve the credit needs of their local communities, including low- and moderate-income (LMI) neighborhoods, consistent with safe and sound banking practices, deterred banks from engaging in lending practices that fuel foreclosures."

ICCR originally lobbied for the expansion of subprime mortgage lending, in order to increase the opportunities for home ownership by lower-income families. But when predatory lending began to grow a decade ago, activist shareholders introduced proxy resolutions against the practice.

According to ICCR, social investors have filed at least two-dozen shareholder resolutions directed at predatory lending practices, the first of which dates back to 1999. Some of the institutions targeted by investors included Citigroup, Wells Fargo, Bank of America, Household International, and Associates First Capital.

Rev. Seamus Finn, an ICCR member, recalled a 2002 shareholder resolution, in which "We petitioned CitiGroup to clean up the portfolio of recently acquired Associates First Capital, which was heavy in predatory loans.

"We were successful in our fight against predatory lending by linking executive compensation at Wells Fargo to successfully addressing predatory lending practices," Finn added.

"In order to help put an end to predatory lending so borrowers could keep their homes, we provided a moral compass to the companies that we entered into dialogue with," Finn concluded.

Despite bringing predatory lending to the attention of investors, it is widely agreed that more extensive regulation is urgently needed in the midst of the current economic crisis. At the same time, in their conversation with SocialFunds.com, Deborah Momsen-Hudson and David Beck of Self-Help Federal Credit Union, a CDFI based in Durham, North Carolina, underscored the urgency of helping homeowners currently at risk to save their homes from foreclosure.

Efforts to curb predatory lending have met with success in several states, according to the
Association of Community Organizations for Reform Now (ACORN), a national community organization of low- and moderate-income families. However, a state-by-state approach is not the optimal approach to a national problem. As such, many believe the time has come to implement anti-predatory legislation on a national scale.

The candidates for president differ on how aggressively to put an end to predatory lending and to help homeowners in danger of foreclosure. Barack Obama proposes $10 billion in aid to help victims of predatory lending prevent foreclosure. He calls for increased penalties on lenders who break home-loan laws, and for increased authority for the Federal Reserve to regulate financial institutions.

John McCain, on the other hand, opposes federal intervention, supporting instead a plan to allow homeowners who are behind on their home loans to apply to a Federal Housing Authority fund to replace their existing loans with government-backed ones.

What role can investors play in efforts to put an end to predatory lending? In addition to pushing for some common sense regulations, they can insist on greater disclosure so that investors can more fully evaluate risks and rewards.

Rauscher of Aquinas Funds and ICCR told SocialFunds.com, "Corporations have to do much more to make their activities more transparent for investors and regulators." As Jonas Kron of Trillium Asset Management Corp. observed, " It's long-term investors that own these corporations, not management."

Hedge funds, which often use investment strategies such as short-selling, should come under increased oversight, as well as other new investment tools and innovative practices. "They should be registered and have the same public disclosure requirements as regulated funds," said Rauscher.

 

 
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