The Community Reinvestment Act No Smoking Gun

Written by Dory Rand on October 10, 2008 - 1:10pm

In recent months numerous critics have unfairly blamed the current financial crisis on efforts to increase lower-income homeownership. 

Most frequently mentioned isthe Community Reinvestment Act (CRA), the balanced, but oft-criticized, set of regulationsdesigned to ensure that financial institutions are meeting the credit needs ofboth upper-income and lower-income consumers. Critics suggest that CRA required banks to weaken underwriting standardsand make loans to persons who could not afford to repay them.
 
Simply put, only about 25 percent of subprime mortgageloans were made by institutions covered by CRA. These institutions were subject to considerably more regulatoryoversight than those made by unregulated mortgage companies––many of which arenow out of business due to reckless, irresponsible and unsustainablelending.  The additional oversightprovided by CRA sets out clear penalties for banks making recklessloans––something that, to our detriment, few other regulations have offered.
 
The rapid growth of subprime lending did not occur until20 years after the passage of CRA:  thenearly doubling of subprime lending activity seen between 2001 and 2006 was aperiod which saw no major changes to CRA.
 
It is unlikely that a rush to qualify new home owners inprevious years, CRA-related or otherwise, resulted in the credit crunch we arefacing today.  Whereas over half ofsubprime mortgages were refinances between 1998 and 2006, less than 10 percentof subprime mortgage originations went to first-time home buyers.  Less than ten percent.
 
The state of our credit markets will be the definitiveconversation for the next several years.  Balanced regulation, like CRA, should be a subject of that conversationas it will undoubtedly play a role in the solution even though it clearlyplayed little role in the problem.

Dory Rand

President