by James Wright
(NNPA)—The financial reform package that is making its way through both houses of Congress will benefit African-Americans by changing the banking system to ensure that it becomes more responsive to low and middle income consumers and makes financial literacy education more readily available.
That’s what Cecelia Rouse, a member of the President’s Council of Economic Advisers, told journalists during a recent conference call regarding the president’s plan to address disparities within the financial system.
“We want to encourage African-Americans to become regular bankers,” Rouse, 46, said. “We also want to keep people in their homes and to save their neighborhoods.”
Rouse, who is on leave from Princeton University, where she is the Theodore A. Wells Professor of Economics and Public Affairs, said that Blacks were targeted early in the past decade for the dangerous sub-prime loans.
“African-Americans were three times more likely to have a sub-prime loan than Whites,” she said. “Fifty-three percent of the sub-prime loans were given to African-Americans. That is interesting considering, for example, in 2006, 57 percent of the sub-prime loans given out are now in threat of foreclosure.”
Rouse said that Obama’s financial reform bill includes a provision that creates a new financial protection agency, in response to the foreclosure crisis. The agency would have two charges: protecting consumers and changing Wall Street.
“We want to make sure that there is strong protection for consumers,” she said. “The agency will work to see that the big banks are fair to consumers and will mandate that mortgage paperwork be simplified. It will also practice oversight of alternative financial services such as payday lenders and check-cashing stores.”
Rouse said that the consumer component will also reign in excessive fees charged by credit card companies and serve as the primary tool for financial literacy and education.
Wall Street will have to change the way it operates, Rouse said.
“There has to be an orderly way to end a bank,” she said, “without the American people bailing out these banks because of bad practices.”
She said that the big banks should pay for their bad business decisions and the shareholders should have power over the salaries of the chief executive officers. A bankruptcy-like regime should be in place, she said, to end the mantra that a bank “is too big to fail.”
Reports and statistics consistently show that, on average, Blacks earn less than Whites and have fewer liquid assets. The lack of liquidity sometimes requires Blacks and other lower-income Americans to resort to alternative financing methods to make ends meet.
In recent years, that has taken the form of a payday loan. In essence, a check-cashing or pawn shop will give out a cash loan at an exorbitant interest rate and ask for repayment within a short period of time.
When payday loan customers cannot make the payment, they are charged additional interest and their checking account, on which the loan is based, is often abused. The practice is legal because of the paperwork the customer signed authorizing the transaction.
Nevertheless, due to abuses, D.C. Council member Mary Cheh, D-Ward 3, sponsored and helped pass into law the Payday Loan Consumer Protection Act of 2007 that bans predatory “payday” lenders from operating in the District.
Rouse admits that there is a place for the type of service that payday lenders offer.
“They play a role and have legitimate uses,” she said. “It is a quick source of cash without paperwork for emergency situations. What is needed by consumers is better management of that money and that is what the financial literacy component is designed to do.”
Rouse did not provide details about what form the financial literacy education would take. She said that she would not be able to comment until the final draft of the financial reform package comes out. However, the goal is to ensure that the country’s financial system benefits everyone, she said.
“Increasing financial literacy will help our communities grow and prosper because people will have the knowledge to make better financial decisions,” Rouse said. “This is something Democrats and Republicans can find common ground on.”