Blame it on the CRA

Right wing blogs and FOX News hold the Community Reinvestment Act (CRA) responsible for the mortgage meltdown. And it’s Bill Clinton’s fault for forcing the CRA down our throats. I’m not a fan of former president Clinton’s but I think his share of the blame for the mortgage meltdown is smaller than most. He was connected to Allen Greenspan for sure and he was caught up in his desire of leaving a legacy of economic boom but there are many others who contributed more. I intend to read the latest Time Magazine article on who is to blame for our current predicaments and use that as a jumping off point for research on Clinton’s liability. Time placed him 13th most responsible and that may be right.

To try to get a handle on this I recommend that everyone look at CNBC’s recent documentary “House of Cards” and read “Fannie Mae’s Last Stand” by Bethany McLean in Vanity Fair’s, February issue. Both of these pieces give names, dates and places surrounding our housing crisis. After these I suggest that you get on the Net and start verifying for yourself.

As to the CRA, it was passed in 1977, so you should really blame former Pres. Jimmy Carter. He’s always a good one to go after. The Act was designed to encourage community banks and S&Ls to meet the need of borrowers in all sections of the community, including low and moderate income neighborhoods. The authors of the bill hoped that by monitoring the lending practices of regulated banks “red lining” would be ended. Red lining is the practice of denying loans to those in low income geographic areas without regard to an individual’s ability to qualify for a loan. This practice was one of the last legal ways of discriminating against people of color. Before the CRA, stereotyping based on where you lived or where your business was located without regard to your individual credit-worthiness was the norm. Few outside sociology class knew this was going on and few today would think this was appropriate. Tiger Woods couldn’t have gotten a loan to start a business in one of these poorer areas before this law went into place. The Federal Reserve Website or Wikipedia, for those of us in a rush, are good places to start to research the CRA.

Years after the passage of CRA, in May 1995, Pres. Clinton signed an amendment to the CRA that was meant to strengthen the original bill. In order to track the effectiveness or lack thereof there was a provision in the bill for a review of its performance after seven years. I’m not go into the 1995 amendment since the bill was later amended by Pres. Bush in August 2005 and it was only after 2005 that the subprime mortgage problem began to occur to any measurable degree. The 2005 amendment significantly altered the Act and was seen by liberals and housing advocates as a weakening of the CRA law. The changes allowed less restrictive definitions of small and intermediate-small banks that amounted to an exemption of more institutions from original CRA rules. If any reader would like to explain or amplify on this I’d greatly appreciate it.

The fact is that the bulk of high risk loans were offered by lenders who were not even subject to CRA regulations. A good article on this is by Michael Barr published in The NYU Law Review in 2005. Barr estimates that only 25% of the subprime loans were made by institutions fully regulated by CRA. It appears that the crisis comes from unregulated loans not from those granted by regulated institutions.


The facts are that the CRA did not require loans be made to those who did not qualify. The CRA did not create or require subprime loans. The CRA also did not require Fannie Mae or Freddie Mac to create Alt-A mortgages, the ones we now call “Liar Loans.”
Loans, made by greedy lenders, not CRA regulated institutions, started an avalanche of risky lending. Their loans were sold to Wall Street firms which sold their own mortgage-backed securities, private label securities (PLS). Fannie and Freddie did buy CRA loans but didn’t enter this market until 2007 in an effort to keep their share of the mortgage market.

Another topic for another day and another blogger is whether the CRA has been effective in accomplishing its original goal to increase lending to low income neighborhoods. Experts come down on both sides of this issue. The Cato Institute, The Competitive Enterprise Institute, Ben Bernanke, The U.S. Treasury and many others have commented on this. A study conducted by The Woodstock Institute of loans made by CRA regulated banks in the Chicago area showed that most loans went to higher income areas. It found that only 16.6% of CRA loans went to low income areas.

From the above, I conclude that the problem wasn’t caused by the CRA, a law that required banks to make a portion of their loans to benefit the community in which they operate. If I’m right, then why is the CRA getting all this grief? It wouldn’t have to do with the fact that the CRA is seen as benefiting low income areas, inhabited by minorities would it? Today CRA is read to mean BLACK. And that is why the CRA is to blame.