The state of the economy has been an interesting subject to me, as of late. People I know and come into constant contact with have been struggling to figure out how the nation and the economy got into the mess it did. I am asked, “What is sub-prime, and how does it figure into what is happening now?” I’ve found myself having to explain a lot of things to a lot of people in ways they can understand, mostly derived through my own research and experience and trying to understand it myself first! Most of my friends, people from all professions and educational backgrounds, have come to me because I’m the most knowledgeable person they know about the subject, simply by dint of my last job. I worked as a Personal Banker for a major bank for 3 years, with securities and insurance licenses. I do not possess a college degree of any type, having chosen military service instead. I like to think of myself as intelligent and well read, and over the next few days, I would like to diary what has happened, from my perspective, in an effort to explain how we got here.
Part 1. What did NOT cause the crisis.
For my first day’s diary, I’d like to briefly cover some of the regulations that are being bandied about by the right wingers on the blogs in an effort to shift the blame to Democrats. Let’s face it; they know that when Democrats have presided over the economy, it improves. As Randi Rhodes likes to say, under Bill Clinton, “… the rich got richer and the poor got richer.” The New Deal brought the nation to the brink of Socialism, but also set the stage for bringing us out of the Great Depression and into the Great Society. Yet, I have seen mocking attempts to assign blame to the New Deal and the Great Society, the former which began 75 years ago. The notion that the crisis now was started by the very programs that sought to fix the abuses that caused the Great Depression is categorically absurd, and as such, is all the time I’m going to spend on it. What I’m going to cover instead is the attempt to tie in the subprime crisis to two laws: the Equal Opportunity Credit Act (ECOA) of 1974, and the Community Reinvestment Act (CRA) of 1977. Both laws are intended to eliminate discrimination by lenders under specific circumstances.
ECOA simply states that a lender cannot discriminate in its lending practice race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract); to the fact that all or part of the applicant’s income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. What this essentially means is that none of these factors may be used in the consideration of a loan. The originator cannot ask it, an application cannot require (or even have a field for) such information, and an underwriter cannot approve or deny the loan on the basis of any factors.
To put it another way, if a bank’s guidelines for a home loan are a 720 credit score, 20% down payment, 2 years of employment, and a 40% debt to income ratio, then they cannot deny that loan of equal value to someone because they are black, a woman, single, a non-citizen, et al. If they meet the requirements, they get the loan, and the requirements cannot consider any of the above factors. This was ingrained into the process by way of how we communicated with the underwriters. For example, all communication between me (the originator) and the underwriter went through an intermediary (the coordinator). It was all in written form, all archived, and had to avoid any wording that was an indicator of the above factors. I could not even use the pronouns “he” or “she”, rather, I was required to use the term, “borrower” or “applicant”.
CRA had much the same purpose, except that it extended protections based on geographical location as well. Banks and lenders would get around ECOA by denying loan applications based on where the applicant lived or the address of the home they were applying to move to. A bank couldn’t deny your loan because you were black, but could deny you if you lived in the black section of town, or were moving there. This was a process called “redlining” and was often applied to middle-class minority neighborhoods, where white working-class neighborhoods would have no such restrictions. Again, to put it plainly, if two people have a 720 credit score, 20% down payment, 2 years of employment, and a 40% debt to income ratio, and the loan is the same amount, you cannot deny the loan for a home in the black section of town while approving the one in the white section of town. CRA also covers requiring banks to provide accessible services to all areas, i.e., they cannot only market and open branches in the wealthy sections of town, they must also open them in the poorer sections as well.
The reasons why these acts have been singled out for criticism by the right are for two reasons. First, they are “dog whistle” arguments, with both being tied into “fraud” by “minorities” by the thinnest and vilest of arguments. This is the same category of arguments that are used against affirmative action, and even Civil Rights laws. It tugs on racist (and in some cases classist) bias by insinuating that those that the act helps are second citizens. Remember, ECOA and CRA still allow banks to assign criteria based on measureable and objective risk: credit score, employment history, income requirements, etc. What it does not do and what the right-wingers are attempting to say it does, is allow a less qualified person who is a minority be approved for a loan, where a white person with the stated qualifications is not. It is not a “quota system.” The second reason is the more obvious one, simply, these two acts were passed by Democratic Congresses, and were the last major banking regulations to be passed by Democratic Congresses. This, of course, is trying to say that the regulations which were passed over 30 years ago are the cause, whereas the deregulation passed by Republicans less than 10 years ago are not.
But that is a different discussion for a different day.
In the next diary, I will focus on the borrowers themselves, and how marketing, decades old sales techniques, and American culture itself drove this process from the ground floor: the people who wanted the loans and the people who sold them.