A Community Reinvestment Act Reader

We still have to debunk this myth?

Felix Salmon takes John Carney of Clusterstock to task for latching on to the right-wing effort to blame the housing bubble and financial crisis (or at least a good part of it) on the Community Reinvestment Act, a law passed in the year of my birth thirty-two years ago.

I thought we had dispensed with this discredited argument, but Carney brings it up, so here’s his smackdown.

First, if you must, read Carney’s posts here, here, here, and here.

Salmon’s posts are here and here. He says at one point:

The fact is that the CRA did not encourage banks to extend the kind of toxic loans which ended up being such an important component of the financial crisis. Indeed, most of those loans weren’t made by banks at all — they were made by unregulated subprime lenders who had no CRA responsibilities whatsoever.

Salmon does a good enough job of demolishing Carney’s argument, but let’s see how deep we can bury it.

Barry Ritholtz of The Big Picture goes off on Carney here with a “CRA Thought Experiment”:

In reality, the precise opposite of what a CRA-induced collapse should have looked like is what occurred. The 345 mortgage brokers that imploded were non-banks, not covered by the CRA legislation. The vast majority of CRA covered banks are actually healthy.

The biggest foreclosure areas aren’t Harlem or Chicago’s South side or DC slums or inner city Philly; Rather, it has been non-CRA regions — the Sand States — such as southern California, Las Vegas, Arizona, and South Florida. The closest thing to an inner city foreclosure story is Detroit – and maybe the bankruptcy of GM and Chrysler actually had something to do with that.

Ritholtz, fairly, asks for one bit of evidence that CRA is responsible in any significant way for the bubble and resulting crisis.

Daniel Gross took a whack at the CRA speciousness back in October over at Slate.

The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren’t regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn’t apply. There’s much more. As Barry Ritholtz notes in this fine rant, the CRA didn’t force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.

And it must be said:

These arguments are generally made by people who read the editorial page of the Wall Street Journal and ignore the rest of the paper—economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice.

Here’s Federal Reserve Governor Elizabeth A. Duke talking to the American Bankers Association in February, noting that a tiny minority of loans were under the CRA:

I would like to dispel the notion that these problems were caused in any way by Community Reinvestment Act (CRA) lending. The CRA is designed to promote lending in low- to moderate-income areas; it is not designed to encourage high-risk lending or poor underwriting. Our analysis of the data finds no evidence, in fact, that CRA lending is in any way responsible for the current crisis…. In fact, the analysis found that only 6 percent of all higher-priced loans were made by CRA-covered lenders to borrowers and neighborhoods targeted by the CRA. This very small share makes it hard to imagine how CRA could have caused, or even contributed in a meaningful way, to the current crisis. Further support for this conclusion comes from our finding that serious delinquency rates for subprime loans are high in all neighborhood-income categories, not only those in lower-income areas, as might be thought if the CRA were a contributing force to the subprime crisis.

One problem with the CRA-is-bad thesis is that the act was passed in 1977. Carney and other anti-CRAers say it wasn’t really enforced until Clinton refined it in 1995. But CRA enforcement was gutted by George W. Bush during the 2000’s—aka “the bubble.” Paul Krugman quotes from the administration’s new white paper on financial reform:

Some have attempted to blame the subprime meltdown and financial crisis on the CRA and have argued that the CRA must be weakened in order to restore financial stability. These claims and arguments are without any logical or evidentiary basis. It is not tenable that the CRA could suddenly have caused an explosion in bad subprime loans more than 25 years after its enactment. In fact, enforcement of CRA was weakened during the boom and the worst abuses were made by firms not covered by CRA.

Aaron Pressman of BusinessWeek had a good roundup back in September of evidence against a CRA role, and he mentioned the Bush-era laxity (emphasis mine):

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.

Pressman points to a post by Robert Gordon in The American Prospect back in April 2008 noting that even the banks (!) don’t have the chutzpah to blame CRA:

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.

The Orange County Register’s Ronald Campbell had an illuminating story in November looking at the CRA question. You don’t (alas) see many news stories point-blank tell you something is BS, especially when they also call out their own editorial page:

From the editorial pages of The Wall Street Journal to talk shows to the op-ed page of The Register, people are charging that the Community Reinvestment Act of 1977 forced banks to make bad loans, leading to financial Armageddon.

There’s just one problem: It isn’t true.

Awesome. In addition to a load of statistics that call the lie, Campbell reports this:

The criticisms of the reinvestment act don’t make sense to Glenn Hayes. He runs Neighborhood Housing Services of Orange County, which works with banks to provide CRA loans to first-time homebuyers. In its 14-year history, the nonprofit has helped 1,200 families buy their first homes. Score so far: No foreclosures and a delinquency rate under 1 percent.

“It is subprime that’s really causing it,” Hayes said of the mortgage crisis. “But CRA did not force anyone to do subprime.”

And the coup de grace is the quote from the American Bankers Association:

Bob Davis, executive vice president of the American Bankers Association, which lobbies Congress to streamline community reinvestment rules, said “it just isn’t credible” to blame the law CRA for the crisis.

“Institutions that are subject to CRA – that is, banks and savings associations – were largely not involved in subprime lending,” Davis said. “The bulk of the loans came through a channel that was not subject to CRA.”

Last year, the law firm Traiger & Hinckley LLP found that (PDF) CRA banks were 58 percent less likely to issue high-cost loans (read: the loose-termed subprime ones Carney’s blaming on them) than non-CRA lenders and when they did their interest rates were a whopping 74 basis points (0.74 percent) below those of non-CRA lenders.

And another Federal Reserve Governor, this time Randall S. Kroszner, who gave this speech in December:

…we found essentially no difference in the performance of subprime loans in Zip codes that were just below or just above the income threshold for the CRA.9 The results of this analysis are not consistent with the contention that the CRA is at the root of the subprime crisis, because delinquency rates for subprime and alt-A loans in neighborhoods just below the CRA-eligibility threshold are very similar to delinquency rates on loans just above the threshold, hence not the subject of CRA lending…

To gain further insight into the potential relationship between the CRA and the subprime crisis, we also compared the recent performance of subprime loans with mortgages originated and held in portfolio under the affordable lending programs operated by NeighborWorks America (NWA). As a member of the board of directors of the NWA, I am quite familiar with its lending activities. The NWA has partnered with many CRA-covered banking institutions to originate and hold mortgages made predominantly to lower-income borrowers and neighborhoods. So, to the extent that such loans are representative of CRA-lending programs in general, the performance of these loans is helpful in understanding the relationship between the CRA and the subprime crisis. We found that loans originated under the NWA program had a lower delinquency rate than subprime loans. Furthermore, the loans in the NWA affordable lending portfolio had a lower rate of foreclosure than prime loans. The result that the loans in the NWA portfolio performed better than subprime loans again casts doubt on the contention that the CRA has been a significant contributor to the subprime crisis.

How about more from the Fed? This time from the Minneapolis bank:

Two basic points emerge from our analysis of the available data. First, only a small portion of subprime mortgage originations is related to the CRA. Second, CRA-related loans appear to perform comparably to other types of subprime loans. Taken together, the available evidence seems to run counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.

Here’s Ellen Seidman, former head of the Office of Thrift Supervision, who wrote against the CRA haters here, calling it “patent nonsense.”

While many of us warned against bad subprime lending before the turn of the millennium, the massive breakdown of underwriting and extension of risky products far down the income scale-without bothering to even check on income-was primarily a post-2003 phenomenon. To blame a statute enacted in 1977 for something that happened 25 years later takes a fair amount of chutzpah.

Also see this good McClatchy story we’ve linked before.


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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.