Well, I've seen one too many of this meme being pushed in the blogosphere, so I thought I would write a consolidated diary that address this talking point. If you don't know what I'm talking about, there is a talking point going around saying that the Community Reinvestment Act was responsible for banks making loans that they didn't want to make to unqualified borrowers. Follow me below the fold for more...
According to wiki-pedia:
The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law that requires banks and savings and loan associations to offer credit throughout their entire market area.[1] The act prohibits financial institutions from targeting only wealthier neighborhoods with their services, a practice known as "redlining." The purpose of the CRA is to provide credit, including home ownership opportunities, to under-served populations, and commercial loans to small businesses. The Act was passed in 1977 and has been subjected to important regulatory revisions since then.
Seems innocent enough, but then Clinton made changes:
In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities.
So the idea goes that CRA forced banks to lend to people whom they knew they shouldn't lend too.
Media Matters notes:
In fact, the federal Community Reinvestment Act -- enacted in 1977 -- applies only to depository institutions, such as banks and savings and loan associations. In testimony before the House Financial Services Committee, Michigan law professor Michael Barr stated that while problems in the subprime lending industry were a driving force behind the housing crisis, he estimated that only 20 percent of subprime mortgages were issued by depository institutions under the CRA. In his testimony, Barr stated:
Despite the fact that CRA appears to have increased bank and thrift lending in low- and moderate-income communities, such institutions are not the only ones operating in these areas. In fact, with new and lower-cost sources of funding available from the secondary market through securitization, and with advances in financial technology, subprime lending exploded in the late 1990s, reaching over $600 billion and 20% of all originations by 2005. More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts.
So got that, 50% of all sub-prime loans were from institutions not covered by CRA 20% of all sub-prime loans were by CRA-regulated banks and thrifts, 30% were by affiliates of those banks which also weren't fully covered by CRA.
MM goes on to note:
Moreover, in comments to the National Interagency Community Reinvestment Conference in March, the president and CEO of the Federal Reserve Bank of San Francisco, Janet Yellen, criticized efforts to blame CRA lending for weaknesses in the mortgage market, stating:
There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term.
So a Fed governor defends CRA.
Beyond that, BusinessWeek had this to say:
Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).
Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. Oops.
It should also be noted that CRA only encourages lending to certain communities, not forces. The FFIEC:
The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations. It was enacted by the Congress in 1977 (12 U.S.C. 2901) and is implemented by Regulations 12 CFR parts 25, 228, 345, and 563e. (See Regulation).
Finally, we have a great point by Robert Gordon:
It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did. And that is not political correctness. It is correctness.