Consumer Law

Blaming the CRA

By Alan White

By Alan White

The financial crisis is now being attributed by the Wall Street Journal editors and other right wingers to the Community Reinvestment Act. The CRA requires banks to provide loans and financial services in underserved communities, particularly poor and minority neighborhoods. This blame-the-victim theory does not withstand fact-based analysis.

The blame-the-CRA theory says that the subprime mess was caused by weak-hearted lenders pushed by misguided bureaucrats into making loans to poor people and minorities who can't repay them. Nothing could be further from the truth. First, subprime mortgages that are now defaulting in droves were made mostly by unregulated mortgage bankers with no CRA obligations or oversight. Second, the Alt-A mortgages that are a major part of the crisis were made mostly to middle-and upper-income white borrowers who didn't want to verify income or wanted a bigger loan than a prime lender would offer. Third, loans made by banks to fulfill CRA obligations, even those to very low-income homebuyers, perform quite well. Fourth, the only category of mortgages in which the foreclosure and default rates are not going up is the FHA program, a program that makes loans almost exclusively to low- and moderate-income Americans, many of them African-American and Latino. The bottom line is that it was the design of subprime mortgages, not the selection of borrowers, that caused them to default in massive numbers. Lenders can make sound loans to underserved groups, or they can make overpriced dangerously risky loans.

The only tiny grain of truth in this blame-the-CRA theory is that HUD, under the Bush Administration, agreed to give Fannie Mae and Freddie Mac credit for buying subprime mortgage-backed securities to meet their affordable housing goals. Fannie and Freddie's affordable housing goals are not technically part of the CRA but they are motivated by the same goals. The problem here is not the goal but the means. CRA and consumer advocates consistently opposed counting high-cost, high-risk subprime loans as meeting any bank or GSE's affordable housing goals, but the laissez-faire HUD and OFHEO regulators went along. The same right-wingers now blaming the CRA were praising subprime lending a few years ago as the solution to meet the needs of previously underserved homebuyers. CRA advocates, on the other hand, have never confused subprime lending with community reinvestment.

Full post as published by CL&P Blog on September 23, 2008 (boomark / email).