A Lot More
Observations on housing's wreckage and recovery
Felix Salmon has been kicking butt in defense of the Community Reinvestment Act following John Carney’s determined attacks on the law as a proximate cause of the financial crisis. Salmon’s IM exchange with Carney is a great read for us geeks, with a fab coup-de-grace from Salmon: “the underwriting is hard. Finding the borrowers in the first place is easy[.] as someone who sits on the board of a cdcu [community development credit union] with effectively zero marketing budget, I can assure you of that” Also see CJR’s Ryan Chittum and Barry Ritholtz at The Big Picture with their own efforts to put the vile “CRA did it” myth to a quick death.
I drink my coffee most mornings from my National Training and Information Center “Celebrating 30 years of the Community Reinvestment Act” mug, and find Carney’s effort to revive the libel not only laughable, but downright alarming. Carney is no doubt writing now because the future of CRA will soon be up for grabs, as Congress decides how or even if to incorporate its fair lending mandates into a new regulatory framework for the financial system.
As an opening volley, Obama administration’s reform plan declares unshakable support of CRA and its important role in maintaining widespread and fair access to credit:
Rigorous application of the Community Reinvestment Act (CRA) should be a core function of the [Consumer Financial Protection Agency]. 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. Moreover, the Federal Reserve has reported that only six percent of all the higher-priced loans were extended by the CRA-covered lenders to lower income borrowers or neighborhoods in the local areas that are the focus of CRA evaluations.
The appropriate response to the crisis is not to weaken the CRA; it is rather to promote
robust application of the CRA so that low-income households and communities have
access to responsible financial services that truly meet their needs. To that end, we
propose that the CFPA should have sole authority to evaluate institutions under the CRA.
While the prudential regulators should have the authority to decide applications for
institutions to merge, the CFPA should be responsible for determining the institution’s
record of meeting the lending, investment, and services needs of its community under the
CRA, which would be part of the merger application.
Note that the plan puts the enforcement CRA under the control of the proposed Consumer Financial Protection Agency instead of its current home with banking regulators – an essential move to protect CRA from undue influence by lenders and the possibility of regulatory capture.
Just to add my two pounds to the Carney pile-on, the bulk of high-risk lending took place outside of CRA-regulated institutions. The great tragedy here is that untold numbers of subprime, Option ARM and other minimally underwritten mortgages were refinances of CRA loans that had they been left standing would have continued to perform just fine. Millions became first-time homeowners because of the end of institutional discrimination by lenders and the willingness of financial institutions to tap into a new market. Those new buyers then became sitting ducks for financial products that promised cash in their pockets in exchange for their hard-won home equity.