Regulation as Civic Empowerment

In February 1975, a coalition of more than three dozen consumer groups paid a call on the newly installed chair of the Senate Banking Committee, Sen. William Proxmire of Wisconsin. Proxmire, a progressive who had previously headed the subcommittee on consumer protection, had already authored several landmark laws, including the Truth in Lending Act. The coalition wanted Proxmire to sponsor a deceptively simple law, which came to be known as the Home Mortgage Disclosure Act (HMDA). The act requires banks and savings institutions to disclose, by zip code, the number and amount of loans they make in their primary service areas.

The activists, who were led by a Chicago homemaker turned activist, Gale Cincotta, and Monsignor Geno Baroni of the National Center for Urban Ethnic Affairs, wanted the information so that they could shame or pressure local banks to stop redlining urban neighborhoods. Literally scores of neighborhood groups in dozens of cities were already several years into an anti-redlining campaign, but information was hard to come by. The only way to determine lending patterns was to look up mortgage records, one at a time, in local recorder-of-deeds offices, and then aggregate the information by bank. Mandatory disclosure under HMDA would provide the data they needed.

Proxmire was impressed with the groups' ingenuity and the evidence that they had already assembled of pervasive redlining. He held four days of hearings and then steered the bill through the committee, onto the Senate floor, and into law, almost exactly as the groups had designed it. Two years later, armed with even more persuasive data, the groups were back to ask for legislation requiring banks to take affirmative steps to make credit available to formerly redlined neighborhoods. Once again, they were well organized and persuasive, and once again Proxmire delivered, this time with the Community Reinvestment Act (CRA).

What is notable about these two laws is that they use regulation as an organizing tool. The laws began as a strategy conceived by community organizers and then became the basis for even more effective organizing. Armed with HMDA and CRA, groups could confront lenders and demand that they change policies. They could provide dossiers to regulators and then become their partners in policing banks. After more than three decades, while some lenders have continued to resist, others have become allies. There is now a whole generation of loan officers who pride themselves as believing in community reinvestment.

Typically, federal regulation is the province of government bureaucrats and industry interest groups. These regulations enhanced citizenship.

The result has been a system that, according to the National Community Reinvestment Coalition (NCRC), has since 1977 leveraged over $6 trillion in reinvestment dollars through CRA agreements with banks providing credit for "affordable housing, small businesses, economic development, and community service facilities in minority and low- and moderate-income neighborhoods" in both cities and rural areas.

As a longtime activist, observer, and frequent critic of the bank regulators, my experience is that the law's simple design and its involvement of citizens have also forced the regulators to become more creative. The result has been beneficial for all parties. As the late Federal Reserve Governor Edward Gramlich said in 2001, "CRA has brought a heightened awareness of lending gaps, has led institutions to discover untapped market potential in underserved communities, and has encouraged the creation of loan products and financial services that allow low- and moderate-income borrowers greater access to credit and financial products."

In short, CRA is not only one of the simplest regulatory laws ever passed by the Congress, it may be one of the most successful. It doesn't impose command-and-control mandates or prescriptive rules. It does not require, nor has it generally resulted in, banks making loans at a loss.

The CRA buttresses HMDA data by providing the public with information, in the form of CRA report cards. It gives community groups the power to intervene in, or protest, proposed bank mergers on the grounds that they haven't met their CRA requirements. That's the relatively soft hammer (the mergers are rarely denied) that gets so much attention from the law's critics. In practice, the CRA's structure has worked to bring community groups into engagement with regulated banks to achieve a better outcome--win-win agreements to lend instead of challenges to lenders.


For example, the Cleveland-based East Side Organizing Project (ESOP) has effectively used town meetings and other tactics to bring lenders to the table and get results. In 2008, "what was originally intended to be a small gathering of home-owners turned into a citywide event," according to ESOP executive director Mark Seifert, resulting in the Cresthaven Development Corporation agreeing to address community concerns. According to its Web site, ESOP also "waged a successful, lengthy organizing campaign against Countrywide Financial that ultimately resulted in a valuable lender-partnership," which its new owner, Bank of America, is continuing.

According to Seifert, his group uses CRA tools and HMDA data in its work but also sometimes takes activists out to throw "thousands of small plastic loan sharks" onto the lawns of bank executive homes or against the walls of their offices, and that helps bring the banks to the negotiating table. "But what really helps, in the Countrywide and other fights, is when we take executives on neighborhood tours, so they can see why better lending is needed," Seifert says. ESOP's current CRA agreements are not only to expand reinvestment lending but increasingly to fix predatory loans, do remediation, and deal with vacant lots that are the result of the mortgage meltdown.

Sometimes, it takes a "financial freedom" bus trip from North Carolina to New York City to send the reinvestment message. "When we got to Citigroup headquarters, the ministers, preachers, homeowners, would-be home-owners, and activists on the bus marched six times in silence around the building, then one time singing, just as in the biblical walls of Jericho story," says Peter Skillern of the Community Reinvestment Association of North Carolina. He credits the organizing tactics with getting the group to the negotiating table with Citigroup, to promote offerings of "a full range of credit products, not just predatory loans, to the association's members."

Proudly featured on the home page of the Neighborhood Assistance Corporation of America (NACA) is a May Wall Street Journal story: "NACA 'Terrorizes' Bankers in Foreclosure Fight." NACA's promotional materials declare: "When NACA takes on a fight we take the junk yard dog approach"; "Once we grab on we never let go no matter how long it takes"; "NACA shines a spotlight on the CEOs, executives and directors who perpetrate financial injustice." As The Wall Street Journal reports: "In February, NACA, as it's called, protested at the home of a mortgage investor by scattering furniture on his lawn, to give him a taste of what it feels like to be evicted."

But NACA gets results. It counts over $10 billion in CRA loan agreements and numerous other victories. Sharing credit are such local groups as ESOP and national ones like the Association of Community Organizations for Reform Now (ACORN), the National People's Action, and numerous other groups that meld the organizing strategies pioneered by the legendary Chicago organizer and teacher Saul Alinsky with the tools added by the CRA.

Saul Alinsky–style organizing is based on the premise that the powerless can build political power through the establishment of stable neighborhood-based organizations that achieve concrete results for their members. The CRA has helped provide a mechanism to build citizen empowerment, and it is not accidental that it was conceived by Alinsky-trained organizers. One person trained in the Alinsky style was a young apprentice organizer named Barack Obama.

The perceived threat of either an "unsatisfactory" CRA report card or, worse, a public merger challenge has created a better system of regulation. Banks now routinely sit down and negotiate with local community-group representatives to make sure that community needs will be met. And the regulatory agencies, which had opposed enactment of both HMDA and CRA as improper forms of "credit allocation" by government, have become believers.

In her February 2008 testimony to Congress, Federal Reserve Board's Division of Consumer and Community Affairs director Sandra Braunstein observed that CRA and HMDA give community organizations three critical tools that most regulations lack, at least in adequate amounts. First, the laws give advocates information through regular and publicly available reporting. HMDA provides empirical data on redlining; CRA provides report cards on institutions. Second, the laws encourage banks to engage directly with advocates, maybe not as equals, but at a higher level than the banks were used to. Third, the laws provide a low-cost and effective enforcement mechanism short of litigation. While strong penalties for violations provide a deterrent against blatant corporate wrongdoing, the first goal of regulation is to get the good actors to achieve public-policy goals, not punish the bad actors.


Are CRA and HMDA anomalies? In fact, there are other examples where government either providing information or encouraging engagement between community groups and seemingly entrenched business interests resulted in better regulation and improved corporate behavior. These experiences provide ideas or lessons for Congress and the Obama administration.

A second strong example of success based on this model is the way that worker-safety laws not only reduced worker exposure to toxic chemicals but also reduced company costs, engaged citizens, and spawned a new toxic-use-reduction movement promoting alternatives and leading to community protections from toxic hazards.

The 1970 Occupational Safety and Health Act (OSHA), besides banning unsafe substances, provided workers with information by requiring management to provide materials-safety data sheets on workplace hazards. It required management to explain those hazards to workers and encouraged development of labor-management committees on occupational safety and health to reduce those hazards.

These committees forced management to engage workers, which helped reduce worker exposure to hazardous chemicals in factories. With help and encouragement from federal officials, union members and other workers were able to organize their side of those plant-based committees into local and regional committees on occupational safety and health, known as COSH groups, to share information and educate others. The labor committees formed alliances with community, women's, and environmental groups to establish even broader networks to spread information and share ideas.

One of those ideas was that local communities, as well as plant workers, had a right to know about their exposure to hazardous chemicals. In 1976, one of the COSH groups, the Philadelphia Area Project on Occupational Safety and Health began organizing for a federal right-to-know law. In 1978, it began working with the Public Interest Law Center of Philadelphia to organize a response to industrial air pollution that the groups believed contributed to high local cancer levels. Following a 1979 "chemical killers" conference attended by over 300 labor, community, and environmental groups, a new Delaware Valley Toxics Coalition succeeded in enacting a Philadelphia right-to-know ordinance in 1981.

According to Paul Orum, now a chemical security consultant to community and environmental groups and the longtime coordinator of the Working Group On Community Right To Know, "Other COSH groups spread the word, and by the time of the Bhopal, India, chemical tragedy that killed hundreds in 1984, about half the states had enacted either worker or community right-to-know laws. Then, Bhopal helped spur passage of the 1986 federal Emergency Planning and Community Right To Know Act."

A centerpiece of that law is its Toxics Release Inventory (TRI), which requires public reporting of toxic-hazard discharges for the purpose of emergency planning. The law, and its predecessor laws that gave COSH committees the ability to engage management on toxic and other hazards in factories, have had an additional effect. They contributed to toxics-use reduction. After all, what company wants to lead its state or the nation in toxic pollution?

In short, just as CRA by empowering citizens changed the way banks think, the TRI and right-to-know laws have changed the way industrial companies think. Orum adds, "Before these laws, companies couldn't tell you why they produce these hazards." Now, as widely reported by community groups and by organizations such as the University of Massachusetts-Lowell Toxics Use Reduction Institute, itself founded by a state toxics-use reduction law, companies use fewer toxic inputs, both to reduce toxic exposure to workers and, later, to avoid toxic dumping and the cost, public shaming, and litigation risk that go along with it. The institute uses a variety of engagement and training seminars and even issues awards as ways to convince companies to switch to safer alternatives. It helps that the companies have a self-interest in their bottom line. Safer alternatives have much lower life-cycle costs.

So, passage of laws that gave the public information and the ability to organize also helped companies reduce their use of toxic chemicals and switch to safer alternatives. This has improved worker safety, lowered costs, led to less dumping of toxic wastes into the environment and even reduced the need to spend scarce dollars protecting chemical plants against terrorists. As Orum says, "Information that is publicly disclosed empowers workers and communities to advocate for more changes."


Yet another model of enlisting citizens as regulatory monitors is the CUB movement. CUB stands for citizens utility board. The idea is that utility ratepayers may voluntarily check a box on their utility bill to fund organized advocacy vis-à-vis state utility regulators, just as workers have rights to petition for similar checkoffs to fund unions to represent their interests. Rather than simply expanding or complicating regulation, government-chartered citizen groups can balance the power of regulated utilities and keep their regulators from being captured.

Wisconsin legislators established the first citizens utility board in 1979. Then, in 1984, citizens in Oregon and elected officials in Illinois approved the establishment of their own CUBs. Following a 1986 U.S. Supreme Court decision holding that a similar mechanism for a California utility consumer group was unconstitutional, the movement stalled. The Illinois and Oregon CUBs, however, developed alternate funding that has allowed them to maintain their effectiveness. The Illinois CUB, in particular, successfully sought a legislative amendment to place its checkoff inserts in large government mailings, such as motor vehicle renewals, instead of in the utility envelopes. It claims to have saved consumers over $10 billion in refunds and blocked rate hikes.

The Oregon CUB uses intervenor funding, where a portion of utility user fees paid to the state for regulation is allocated to effective citizen groups for their participation in rate case negotiations. Groups, including CUB, apply in a governmental process for fees to cover their legal and other costs to represent their members and ratepayers in cases before the commission.

Both of these methods are more effective and lower in cost than is the typical consumer-group fundraising--direct mail, door-to-door canvassing, grass-roots events--at providing the CUBs with a stable low-cost funding base. By giving consumer groups the resources that they need to participate, government obtains better utility regulation than it might by hiring more bureaucrats.

In the telecommunications and media arena, the twin pillars of information and engagement have helped provide community groups with the power to challenge media mergers and company sales as well. For example, radio and television stations must keep a public file documenting how much of their programming is designed to meet community needs. Citizen groups use these files (information) to challenge (power), under statutory requirements, broadcast-license renewals of firms that fail to meet local community needs as defined in the Communications Act of 1934.



As congress reworks the financial system, it could also draw on the CUB strategy, by financing organized consumer intervention through voluntary user fees. Despite the setback of the 1986 Supreme Court case, more recent cases have generally upheld similar government-approved checkoffs to business, for a variety of agricultural cooperatives, including the "Got Milk?" and "Pork. The Other White Meat" campaigns. Those successes, and the need for real financial regulatory reform, suggest that it is time to revisit the consumer checkoff approach.

A good place to start would be giving consumers, depositors, small investors, and taxpayers their own checkoff-funded financial-reform organization to counter the power of the financial sector and help seek solutions to the financial meltdown wrongly blamed on the CRA. Just before he and his wife were killed in a plane crash during his 2002 re-election campaign, Sen. Paul Wellstone filed his last piece of legislation, to establish the Consumer and Shareholder Protection Association, to be funded by a CUB-like checkoff on regulated financial firms.

Laws that help citizens or workers build countervailing power are an underused mechanism for building better, more efficient government that intrudes less into markets and achieves better outcomes. The Wagner Act gave workers rights to organize. The Freedom of Information Act, although used by business groups also, gives citizen groups and the media some needed information and transparency about their government's operations and effectiveness.

All of these citizenship strategies address the same broad problem: the imbalance between the concentrated power of affected industries and the diffuse power of ordinary people. By designing regulation so that it engages and informs citizens, facilitates organizing, and puts citizens into direct encounters with the industry as well as with regulators, these policies energize citizenship, and they begin to redress the structural power imbalance.