Community Reinvestment Act of 1977

[From 9/27/08, in response to conservative claims that the Community Reinvestment Act of 1977 "forced" the banks to make bad loans, causing financial meltdown.]

The Community Reinvestment Act of 1977 (CRA) is getting a lot of blame for our current economic crisis. Enacted to prevent mortgage discrimination (“redlining”) against low-income and minority families, many now claim that the act “forced” lenders to make bad loans to people with poor credit, resulting in financial disaster. Is this analysis correct? Let’s look at it.

CRA was enacted in 1977; the subprime lending at the heart of the current crisis exploded more than 25 years later. Additionally, the Bush administration weakened CRA regulations in 2004 by exempting small and midsized banks from the law’s toughest standards. Yet subprime lending intensified—at the very time when activity under CRA had slowed and the law had weakened. So how can CRA be the main engine for subprime lending?

It becomes even more difficult to blame CRA for the mortgage meltdown when one realizes that the law doesn’t even apply to most of the loans being made today. Half of subprime loans came from lenders not subject to CRA, and another 25 to 30 percent came from institutions not required to fully comply with the law (see http://www.house.gov/apps/list/hearing/financialsvcs_dem/barr021308.pdf).

Perhaps one in four subprime loans were made by the banks and thrifts fully subject to CRA.

But for the sake of argument, let’s say that 100% of subprime loans were made because the government required lenders to do so. Even then, financial meltdown wouldn’t have occurred if that debt hadn’t been sold all over the world as mortgage-backed securities.

Without the sale of these securities, some lending institutions would have (rightly) gone under as poor-risk borrowers became unable to pay their mortgages, but the bad debt would not have been integrated into the entire financial system.

In other words, it wasn’t the debt itself; it was the very lucrative selling of the debt that got us where we are today.