Between the recent string of bank failures and shotgun weddings, Citigroup’s FDIC-brokered purchase of troubled Wachovia this morning, and talk of handing off a heaping helping of toxic mortgage debt to taxpayers in order to avert economic catastrophe, it’s clear that America will be watching its financial institutions more closely for a long, long time. Perhaps the most famous and hotly debated financial regulation since the 1930s has been 1979’s Community Reinvestment Act (CRA), a source of lifeblood for inner-city neighborhoods and community organizations for nearly 30 years. Where does the CRA fit into this mess?
As one might expect, many conservatives blame the CRA for instigating the subprime debacle. From the National Review:
The CRA empowers the FDIC and other banking regulators to punish those banks which do not lend to the poor and minorities at the level that Obama’s fellow community organizers would like. Among other things, mergers and acquisitions can be blocked if CRA inquisitors are not satisfied that their demands — which are political demands — have been met. There is a name for loans made to people who do not have the credit, assets, income, or down payment to qualify for a normal mortgage: subprime.
From the Mises Institute, an Alabama libertarian think-tank:
Under the CRA, if a bank wants to make virtually any change in its business operations — merging, opening up a new branch, getting into a new line of business — it must first prove to regulators that it has made ‘enough’ loans to the government’s preferred borrowers. The (partially) tax-funded ‘community groups’ like ACORN (Association of Community Organizations for Reform Now) can file petitions with regulators that stop the bank’s activities in their tracks, perhaps defeating them altogether. The banks routinely buy off ACORN and other ‘community groups’ by giving them millions of dollars as well as promising to make even more dubious loans.”
By intervening — even just threatening to intervene — in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers.
Stephen Colbert famously quipped that “reality has a well-known liberal bias.” These statements clearly illustrate the neocons’ preference for ideology over objective reality. The FDIC, in actuality, rarely blocks bank activity on account of the CRA. Back in 1999, when the Gramm-Leach Act pulled the CRA’s teeth, Matthew Lee noted in Shelterforce:
“Only holding companies whose banks are rated ‘Satisfactory’ or above for CRA can take advantage of the new powers allowed in the bill. But since in 1998 over 97% of banks were given ‘Satisfactory’ or better CRA ratings, and since none of the 50 largest bank holding companies have a less than ‘Satisfactory’ rating, this supposed CRA win has little impact in the real world. As Sen. Gramm said during the final debate: under the bill, if the applicant’s banks are rated Satisfactory for CRA, approval of their acquisitions is automatic.
Those new powers also include forming financial holding companies and foregoing a routine CRA more often than once every 4 years. (Again, in reality, these exams can be, and often are, conducted much less frequently.) Later, in 2005, the FDIC, Federal Reserve, and Office of the Comptroller of the Currency (in concert with the Bush administration) let the financiers’ belts out another notch, by expanding the CRA’s definition of “small banks,” thereby allowing more institutions to fall under the looser regulations afforded to “small” institutions. So much for having to capitulate to the demands of community organizers.
Again come those pesky facts, refuting the claim that the CRA pushed banks to make risky subprime loans. According to the National Community Reinvestment Coalition’s CRA Myth and Fact article, only 25 percent of of subprime loans in question were originated by CRA-regulated financial institutions. And nevermind the question of timing — while the CRA was passed in 1977, the explosion of subprime lending occurred more than two decades later — almost doubling from 2001 through 2006, a period during which the CRA clearly was not expanded. On top of all that, the CRA does not mandate banks to make only home loans, and actually punishes banks for reckless and predatory lending.
To put it in simple terms: yes, the CRA gives incentives to banks to meet the credit needs of low-income people. No, the CRA does not require banks to originate mortgages under fraudulent or otherwise duplicitous premises whose payments unexpectedly double, triple, or even quadruple after a certain period of time. That’s the source of this mess. These reckless lenders could not possibly have sabotaged the American economy in order to comply with the CRA. Even if the CRA did promote reckless lending – which it does not — the vast majority of these lenders were not, and are not, subject to CRA regulation.
I’m not the only person to make this point. Comment at Economist’s View and The American Prospect (twice, in fact) has debunked the bogus claim that the Community Reinvestment Act is at fault for our current economic woes.
In the 1980s, Ronald Reagan made a case against supposed big government largesse by invoking the South Side Chicago welfare queen as a bogeyman. Now, “extortionary” community organizations and “radical leftist” community organizers are the straw man for America’s latest economic crisis — and the latest round of the culture wars. Yet the Community Reinvestment Act, the only piece of legislation that acknowledges community organizations as legitimate partners in the provision of financial services, has only grown more impotent through a decade of deregulation. For as routine as the right alleges that bank buyoffs of bêtes noires like ACORN are, it’s clear that taxpayer buyoffs of massive financial institutions are, in fact, the routine. Some act.