CRA is not to Blame for the Mortgage Meltdown

It's time to stop the scapegoating: According to a study by the Federal Reserve, 94% of high-cost loans originated during the housing boom had nothing to do with Community Reinvestment Act goals. Lending to poor didn't spur crisis -Fed's Kroszner

The Comptroller of the Currency. John C. Dugan, agrees: "CRA [the Community Reinvestment Act] is not the culprit behind the subprime mortgage lending abuses, or the broader credit quality issues in the marketplace. Indeed, the lenders most prominently associated with subprime mortgage lending abuses and high rates of foreclosure are lenders not subject to CRA. A recent study of 2006 Home Mortgage Disclosure Act data showed that banks subject to CRA and their affiliates originated or purchased only six percent of the reported high cost loans made to lower-income borrowers within their CRA assessment areas."**

* Remarks by John C. Dugan, Comptroller of the Currency, before the Enterprise Annual Network Conference (November 19, 2008), available at www.occ.gov/ftp/release/2008-136a.pdf.

** Glenn B. Canner, Senior Advisor, Federal Reserve Board, "2007 HMDA Data: Identifying Trends and Potential Regulatory Concerns," presentation at the Consumer Bankers Association's 2008 CRA and Fair Lending Colloquium, October 27, 2008.

Consider these facts:

CRA was effective long before the subprime market existed. CRA was passed in 1977 to correct the longstanding problem of redlining – the lack of lending in low and moderate income communities and in communities of color. CRA has been on the books for three decades, while the lending practices that created this crisis didn't exist until the past five years.

Most subprime lenders weren't covered under CRA. The predominant players in the subprime market – mortgage brokers, mortgage companies and the Wall Street investment banks that provided the financing – aren't covered under CRA. Finance company affiliates of major banks also participated heavily, but are only included in CRA to the extent their bank parents choose them to be. In fact, many banks shifted the most risky lending – the loans at the root cause of this current crisis -- to affiliates to escape CRA requirements and regulatory oversight.

Wall Street created the demand for riskier loans. The subprime market is the result of loans made without regard to the borrower's ability to repay the loan and with little or no documentation of income. Lenders chose to engage in risky underwriting practices because Wall Street was eager for high-interest investments, not because of CRA.

Regulatory oversight and accountability was missing. The lack of regulation in the subprime market made it easy for subprime lenders to undercut responsible lending. Because lenders used artificially low initial payments and passed the loans onto investors while hiding the disastrous consequences coming down the line, many borrowers found themselves in loans that were ultimately unaffordable. In many communities, particularly communities of color, subprime lenders were often the only ones serving the community. Had regulators leveled the playing field through common sense underwriting requirements and more vigorously enforced CRA requirements instead of allowing a race to the bottom, this crisis would have been averted.

The majority of subprime loans went to white borrowers. It is true that African-American and Latino families disproportionately received ruinous subprime loans, but the majority of total loans were made to non-Latino white families. According to data from the Home Mortgage Disclosure Act (HMDA) from 2005-2007, 58% of higher-cost loans went to white borrowers, with 18% to African-American borrowers and Latino borrowers each.

The solution to this lending crisis and to make sure that it is not repeated is to require lenders to use sound underwriting practices, require Wall Street to take responsibility for loans it purchases, and to provide more assistance to homeowners facing foreclosure.

The answer is not to cut off access to credit in underserved communities. Homeownership still represents the best way for low and moderate income families to build wealth – we shouldn't abandon that goal because of lenders' bad decisions.