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January 04, 2010
Fed Chief Acknowledges Failure of Regulatory Oversight in Subprime Mortgage Crisis
    by Robert Kropp

Federal Reserve Chairman Bernanke calls for strengthening regulatory system to prevent the recurrence of a crisis warned of by the socially responsible investment community for years.


In a speech delivered before the American Economic Association (AEA) on January 3, Federal Reserve System Chairman Ben S. Bernanke acknowledged that insufficient regulatory oversight of subprime lending practices contributed to the economic crisis and the subsequent recession.

In the course of the speech, which was largely devoted to his defense of the Fed’s monetary policy in the years leading up to the crisis, Bernanke said, “The most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards.”

Bernanke continued, “Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble.”

“All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs,” he added.

The so-called predatory lending practices that led to the crisis did not go unnoticed by the socially responsible investment (SRI) community, who for years before the crisis had been engaging as shareowner advocates with financial institutions to address such practices. As far back as 1993, members of the Interfaith Center on Corporate Responsibility (ICCR) filed six shareowner resolutions that requested closer regulation of subprime mortgages.

Shareowner activists filed a resolution addressing predatory lending with Wells Fargo in 2005, and engagement with Citi led to a curtailment of that institution’s predatory lending practices.

In 1999, the Self-Help Credit Union, a community development financial institution (CDFI), led a successful effort to pass an anti-predatory lending law in North Carolina. According to Martin Eakes, co-founder of Self-Help, “We helped set strong standards to preserve the important benefits of the subprime mortgage market while weeding out the worst abuses.”

Bernanke’s speech was short on specific recommendations for reforming regulatory oversight at the Fed. But in crafting regulatory reforms at the Fed, he could do far worse than consulting with the members of the SRI community that have been calling for such reforms for years.

 

 
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