October 24, 2008
Studies Rebuff Charges of CRA Complicity in Financial Crisis
by Robert Kropp
Attempts by some conservatives to link the Community Reinvestment Act to predatory mortgage lending
are shown to be misleading and often false.
Of all the reasons for the current financial crisis, the effects of predatory mortgage lending
stand out as perhaps the most onerous. Prowling the same low-income, often minority, neighborhoods
that have been served by banks originating loans in their Community Reinvestment Act (CRA) assessment areas since 1977,
predatory lenders exploited loosened underwriting standards and prioritized loan sales over loan
Recent studies clearly point out that CRA banks were not part of the
predatory lending frenzy. The mission of the Community Reinvestment Act is to encourage
participating financial institutions to help meet the credit needs of the communities in which they
operate, with particular emphasis on low- and moderate-income neighborhoods, but in ways that are
consistent with safe and sound banking operations.
Mira Marshall, Chief Compliance Officer
for Policy at the Federal Deposit Insurance Corp.—one of the regulatory agencies responsible for
the CRA—said, "We have looked into assertions that the CRA was somehow responsible for the current
crisis, and have found that they have no factual basis."
"The CRA statutes require that
banks lend prudently. In fact, a Federal Reserve study conducted last year concluded that CRA banks
were much less likely to make the higher-priced loans that have sent so many borrowers into
foreclosure," Marshall continued.
"Lending by CRA banks has remained one of the bright
spots throughout the crisis," added Warren Traiger, an attorney at Traiger & Hinckley, a law firm with expertise in CRA
compliance. "While some of the thoroughness of CRA examinations was lost in the push for
deregulation by the Bush administration, our studies suggest only that strong performances by CRA
banks could have been even better."
In a study entitled "The Community Reinvestment Act: A
Welcome Anomaly in the Foreclosure Crisis," Traiger & Hinckley found that in keeping with its
mission, the CRA actually deterred irresponsible lending. Banks subject to CRA requirements were 66
percent less likely than other lenders to originate a subprime mortgage loan, and 58 percent less
likely to originate subprime loans to low- and moderate-income borrowers, even though CRA banks
were 16 percent less likely than other lenders to deny a loan application.
according to the report, when CRA banks did issue subprime mortgages, the average annual percentage
rate was significantly lower than on similar loans from other lenders. And perhaps most
importantly, CRA banks were more than twice as likely as other lenders to retain originated loans
in their portfolio, as well as significantly more likely to retain loans they originate in their
CRA assessment areas than non-CRA banks.
The numbers did not stop some conservatives from
trying to shift the blame for the economic crisis to the CRA. In a column whose headline echoed a
racially-charged campaign advertisement by the late Jesse Helms, the right-wing pundit Ann Coulter
stooped so low as to claim that qualifications for mortgage loans from CRA banks included "having a
good jump shot."
"The blame is misplaced," Traiger said. "In fact, exactly the opposite
is true. Our study shows that CRA banks in low-income neighborhoods have loans in their portfolios
that were prudently made. There is simply no empirical date supporting the position of those who
blame the CRA for the crisis.
Less inflammatory critics of the CRA have charged that the
CRA forced banks to make unsafe loans to unqualified low-income borrowers and that loans were made
based on race and little else. These allegations have led Marc Morial, the former Mayor of New
Orleans, to call on Treasury Secretary Henry Paulson to publicly refute them.
CRA critics ignore the fact that the CRA does not require that loans be mad, only that borrowers in
poor neighborhoods receive equal access to safe and sound lending practices. They also deny the
reality that most subprime mortgage loans were made by mortgage brokers and lenders and securitized
by investment banks, none of whom have anything to do with the CRA.
"It's important that
the record be set straight, in response to these ridiculous allegations," said Ali Solis, Vice
President of Public Policy at Enterprise Community Partners, a national nonprofit
with 25 years of experience in the community development and affordable housing field that invests
in communities at a rate of $1 billion a year.
"We are looking at the possibility of 5
million foreclosures by 2010, and opponents of successful public-private partnerships like the CRA
prefer to use the financial crisis for political purposes," continued Solis.
interesting to note that many conservative Republicans continue to support the CRA, including
Congressman Mike Turner of Ohio, a former mayor of Dayton," Solis added. Turner has successfully
introduced federal legislation to help families who are potential victims of lending practices that
could lead to foreclosure.
"The CRA fosters successful public-private partnerships that
help house hard-working low- and middle-income families," Solis said. "Now we must increase our
efforts to prevent foreclosures to keep people in their homes, and devise a plan to deal with
abandoned housing that has devastated so many neighborhoods."
Partners also came to the defense of the CRA with a statement from President and CEO Doris Koo.
In the statement, Koo contends that "not only has CRA not caused this crisis, it has
helped build our nation’s economy during the past three decades, demonstrating that investment in
low- and moderate-income communities pays off for all of us.
"CRA has helped house working
families, senior citizens and people with disabilities and others with special needs, built
community centers and job training facilities, started small businesses serving low-income
communities and furthermore, improved neighborhoods and lives," Koo's statement continued.
A recent statement by a group of civil rights, consumer, community development, and housing
groups that includes Enterprise Community Partners states, "The real problem affecting our
financial system is failed regulatory policy and oversight. CRA exams provide clear and strong
incentives for banks to make safe and sound loans. CRA is an antidote, not a cause of the current
And in a recent hearing on the economic crisis held by the Senate Committee on
Banking, Housing, and Urban Affairs, Senate Banking Committee Chairman Christopher Dodd said, "CRA
lending is not responsible for the crisis. If it were responsible, the crisis would have happened