The Community Reinvestment Act Didn't Do It

by Chris Sturr | September 29, 2008

Heard the latest joke about the current financial crisis?

The Democrats did it.

Actually, that’s not a joke, but it’s the sad excuse for one that corporate capitalist apologists are pushing. Ann Coulter even put out an entire rant with the typically subtle title “THEY GAVE YOUR MORTGAGE TO A LESS QUALIFIED MINORITY. Other lessor minds, from Rush Limbough to the Wall Street Journal, concur.

The twisted thinking goes like this: in the late 1970s fair housing advocates pushed through the Community Reinvestment Act, or CRA, to stop banks from discriminatory practices like “Redlining” (the term comes from banksers who would use a red marker to mark off the minority neighborhoods on a city map to show where they refused to lend). Jim Campen discussed the act back in 1997. (The Act was reformed in 1995 and 2003). Right-wing pundits are now claiming that the law forced banks to give mortgages to “unqualified” minorities who are now all defaulting on their mortgages.

Simple story, but there’s one problem. It’s not what actually happened.

Writing on the Public Citizen’s Consumer Law & Policy blog, Alan White wrote this response:

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.

Read Alan White’s full post here.

2 comments

Comments (2)

  1. Not entirely true…Banks, and lenders, in order to open new branches and buy or merge with other banks, are subject to their CRA rating. The amount of money they can lend from the Federal reserve (and the rate at which they have to pay it back) is affected by this CRA rating. So, to say that banks didn’t HAVE to lend to these people isn’t exactly true. They did if they wanted to compete and stay in business.Also, mortage companies SELL their mortgages immediately to CRA covered banks. So, the subprime mortgage crisis is IN PART due to the CRA .By the way – CRA was proposed in 1977 and signed into law that same year by President Jimmy Carter- not the late 90’s. There were some sweeping changes to in in 1995 – allowing more oversight and changes to the rules. Also, changes again in 2003. You really should get your facts straight before blogging.

  2. Anonymous — Thanks. We’ve updated the post to correct the error (which wasn’t in Campen’s 1997 article).As to your other comments, the evidence seems to show that the loans made to fulfill the banks CRA ratings aren’t the ones causing the problem.

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