CFPA Czar or Fox in the Hen House? You Decide.

The activity surrounding the controversial Consumer Financial Protection Agency (CFPA) in the financial reform legislation is really picking up these days.  But many Americans would never know it.  It seems Democrats may have learned something from the experience of the health care bill after all.  In their efforts to avert a repeat disaster of losing control of the message, they appear to be taking every step necessary to ensure that the public engages as little as possible in this debate.

But I assure you, this is a debate that the American public should engage in, pronto.

Because behind the scenes, certain lobbyists are quietly but aggressively scurrying about, pushing hard for the passage of the CFPA in a power grab by the Executive Branch that would dwarf the Health Care Reform bill and the Patriot Act.  And with the passage of the proposed CFPA, one man in particular with a history tied to some of the deepest tentacles in the financial crisis – and to the Community Reinvestment Act changes of 1995 – would gain the power to selectively manipulate the entire landscape of the financial, small business and housing markets.

Last week, we reintroduced you to an early trigger in the financial crisis, with good reason. In “Death by Senator: As Financial Reform Looms, We Revisit IndyMac,” we revisited the role that Senator Chuck Schumer’s (D-NY) very public letter played in the fall of one financial institution.  As I ended that piece, I teased that there was more to the story that would soon follow.

So, let’s pick up from June 30, 2008.

Merely days after the now infamous Schumer letter triggered a run on the bank that would total over $1.3 billion, this lengthy and scathing report was released to the public:

The report, written by the left-wing Center for Responsible Lending (CRL), condemned IndyMac’s lending practices.  The conclusions in it were drawn entirely from statements by laid-off IndyMac employees and consumer advocacy trial attorneys with active lawsuits against the lender, which drew a great deal of criticism and sparked cries of bias within the industry.  Nonetheless, the general public connected with that report and it drove the last nail into IndyMac’s coffin, further poising CRL as the champion for – and direct beneficiary of – federal financial regulation.

In addition to the timely coincidence of the CRL report having released almost in concert with Schumer’s letter, the fact that it came from CRL is even more curious.

This is an organization that is no stranger to Capitol Hill. Democrats have invited CRL to testify before Congress on a multitude of occasions.

And frequently among those guests invited from CRL to testify has been… Eric Stein.

A staunch proponent for social justice in affordable housing and payday lending, Stein had long been the President/SEO of CRL’s parent network, the Center for Community Self-Help.  For over 30 years, Self-Help has billed itself as a non-profit organization that serves the interests of minorities and the disadvantaged by financing loans and investing in real estate development in “low-wealth communities.”  In parallel, Stein had also served as Senior Vice President of CRL, which serves as the research and policy arm to Self-Help.

Stein’s biography also illustrates other positions that may have been beneficial relationships for CRL, including his employment with Fannie Mae, and an employment stint with Congressman David Price (D-NC).  Incidentally, Congressman Price has received nearly $5 million in federal grants for Self Help Ventures Fund, one of Self-Help’s many affiliates, located in the same district.

Stein was also a member of the Community Development Advisory Council of the Federal Reserve Bank of Richmond.

So, where is Eric Stein today?  Working in the United States Treasury Department, and gearing up to head the CFPA.

In early 2009, President Obama appointed Stein to the newly created position of Deputy Assistant Secretary for Consumer Protection, where Stein has been key in writing the consumer protection language in the proposed financial reform legislation. He is also in charge of designing the dually proposed Consumer Financial Protection Agency.  Should the bill become law, Stein is expected to head the new agency, which will have immense powers that extend far beyond mortgages and financial investments.

That’s a lot of power to be held by one unelected official.  Especially for one so closely tied to an organization that stands to benefit immensely from this new agency and the legislation behind it.

So, what do we know about this organization with which Stein has spent so many years of his career?

We first introduced the Center for Responsible Lending to you a few weeks ago, but let’s take a closer look at the organization and its parent, Center for Community Self Help.

The Center for Community Self-Help:  Born From the CRA

After the Community Reinvestment Act (CRA) was passed in 1977, most of its implementation began rolling out around 1979.  And in 1980, the Center for Community Self Help was founded with its focus on serving the very market that was now the beneficiary of the new redlining laws. Soon after, Self-Help joined with Fannie Mae to establish a program for borrowers who were underserved by banks in the primary market.  With this new secondary market underway, it was Self-Help that collected all of the information from Fannie Mae’s borrowers, tracked their loans, and produced analysis that was then used to put pressure on the larger banks to issue more loans to underserved communities.  As Deborah Momsen-Hudson, Vice President & Director of Secondary Marketing, put it, “We’re an R&D lab for the financial industry.”

In direct response to the research produced by Self-Help and Fannie Mae, the CRA laws were subsequently expanded in 1995 to establish quotas for issuing mortgages to residents of underserved communities and to levy fines against lenders that did not meet those quotas.  The new laws also required institutions to offer ATMs and local branch services in areas that were previously considered low usage, high risk areas for crime.

But as always, there were unintended consequences.

Peter Wallison has written an excellent analysis of how the unintended consequences of the 1995 changes to the Community Reinvestment Act laws greatly contributed to the financial crisis:

Together, the tighter CRA requirements and the affordable-housing regulations imposed on the GSEs substantially reduced the standards that had to be met to qualify for a mortgage. The number of CRA loans was not large, but they required banks to devise ways of lending to people who would not previously have qualified for a mortgage. Once Fannie and Freddie began accepting loans with low down payments and other liberalized terms, the same unsound standards were extended to borrowers who could have qualified under the traditional underwriting standards. In addition, federal regulations encouraged bank lending for housing in preference to other lending, and tax policy favored borrowing against (and thus reducing) the equity in a house.

These policies were effective in the sense that they achieved some of the intended results. Between 1995 —when lending quotas based on the CRA became effective—and 2005 , the proportion of American households that owned their own home rose from 64 percent, where it had been for about twenty-five years, to 69 percent (Vlasenko 2008 ). A measure of the unintended results of federal policy, however, is that home prices doubled between 1995 and 2007 ; and that the housing bubble was composed—to an unprecedented degree—of subprime and other nonprime and risky loans. Banking-capital regulations and the deductibility of interest on home-equity loans made a crisis inevitable once this housing bubble collapsed.

Coincidentally, these were – and remain – the very markets that Self-Help serves and the very services that Self-Help offers.  The regulations that Self-Help lobbied to bring about delivered for them fruitful gains, as the pool of secondary mortgage customers exploded, and the demand for short-term lending and easy access to cash and ATM services skyrocketed.  Hence, the Self-Help network expanded from mortgage lending to Credit Unions, short term lending, real estate development, and the financing of community facilities, such as schools, non-profits, and day-care centers.

And it’s a model upon which our government has based an entire entitlement program.  In 1994, President Clinton modeled the Treasury Department’s Community Development Financial Institution Fund after Self-Help’s lending plans.

The Center for Responsible Lending:  Crisis Creator?

After the successful results gained by Self-Help’s research in the 1990’s, the parent network expanded to include a designated research and policy arm, The Center for Responsible Lending.  Founded in 2002, CRL is “an affiliated nonprofit research and policy organization dedicated to curbing predatory lending.”

Much like the Center for American Progress is the think-tank that provides all the research to support the left-wing agenda, CRL serves that same role for the left specifically for matters concerning the financial and real estate industry.  Their research papers pool data from other liberal sources and are often aided by the canvassing and mobilizing efforts of establishment left-wing groups like ACORN and organized labor.  Just as in the Health Care “crisis”, their reports often seem to be cleverly timed to coincide with certain events to force a particular policy issue or create a financial or housing equality “crisis”, and at times may even be aided along by Washington insiders.

Case in point:  IndyMac.

The Self-Help Money Machine

Under Eric Stein’s leadership, Self-Help and CRL have certainly expanded quite a bit, reaching their tentacles into a multitude of different areas.  Spreading out from beneath this primary partnership of the two flagship organizations, there is a structure of at least 10 major affiliates, and another 37 sub-affiliates, consisting of an entire network of credit unions, mortgage and short-term lending, venture funds, real estate development companies, and investment companies.  Couple that with a slew of paid lobbyists (some of whom have worked for Congresswoman Jan Schakowsky), and maybe you’ll wonder too why a non-profit like Self-Help would require such sophistication.

The primary source of funding behind Self-Help and CRL since its inception has been non other than the notable subprime/Alt-A loans king and queen, Herb and Marion Sandler.

You may recognize the Sandlers from their various philanthropy projects like the Center for American Progress, and various media outlets, as well as their investments in groups with other notable investors like George Soros.  Or maybe from the SNL skit they ordered off the Internet.

But the Sandlers’ most relative and probably best-known investment was California headquartered GoldenWest Financial/World Savings bank.  The couple are said to have made off with $2.3 billion in cash after they sold off World Savings bank to Wachovia in 2006.  Shortly thereafter, Wachovia collapsed from the weight of the toxic loans that had been bundled up into World Savings’ portfolio, far from the sunlight of peering eyes.

In fact, the Department of Justice and the Securities and Exchange Commission are both investigating claims that Golden West/World Savings lied about the quality of its loans to its investors and broke the law by fraudulently luring customers into loans they could never afford.

Self-Help and its CRL affiliate may seem like one of those charitable do-good organizations that is improving communities all across America and lifting Americans out of poverty thanks to the generous funding of benefactors like the Sandlers.  But the reality is, the faces of the corporate elite may often be masked behind well-intended (and sometimes not so well-intended) do-gooders.

We must always do our due diligence and at least ask the question:  Is it possible that there are ulterior motives at play here?  Is the Self-Help network a sincere collective of honest do-gooders?  Or do they have a vested interest in seeing a repeat of the financial reform of the Clinton years, only this time on steroids?  Look at their competitors and think about which organization the new CFPA would favor.

Needless to say, we should be asking the same of Mr. Stein, the current Treasury executive who ran this organization for so many years, who worked for Fannie Mae, who worked for a Congressman who coincidentally secured millions in funding for Self-Help, who has appeared frequently before Congress to push for financial regulation, and who is now just one heartbeat away from controlling the engine of our entire nation’s economic system.

All this, and still, we haven’t even scratched the surface on this story yet.  Continue to stay tuned…