The pernicious lie that a law designed to increase lending to people of color and in lower-income neighborhoods played a key role in the financial meltdown in Wall Street won’t go away, even though there’s no evidence to support it. And now House conservatives are being asked to take a stand: Embrace a lie, and with it a return to the housing and lending discrimination that preceded the 1970s, or admit that the Community Reinvestment Act has largely succeeded in fostering lending practices that are both equitable and responsible.
Rep. Keith Ellison, D-Minn., sent a letter on Friday to House Minority Leader John Boehner on behalf of the Congressional Black Caucus asking if the idea that it was “lending to minority communities that caused the current financial crisis (represents) the position of the Republican Caucus.”
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His letter was prompted by a statement by freshman conservative congresswoman Michele Bachmann, R-Minn., about the Community Reinvestment Act, which was passed in 1977 in response to longstanding patterns of racial discrimination by the mortgage industry. Bachmann at a hearing on September 25 approvingly quoted a column in Investors Business Daily that blamed lending “on the basis of race” for the crash in the mortgage market. That article said, “The Carter-era Community Reinvestment Act forced banks to lend to uncreditworthy borrowers, mostly in minority areas. Age-old standards of banking prudence got thrown out the window. In their place came harsh new regulations requiring banks not only to lend to uncreditworthy borrowers, but to do so on the basis of race.”
Ellison’s letter states:
It is clear from Rep. Bachmann’s comments that she believes that the bipartisan laws enacted over the past decade ensuring that minority communities have equal access to banking and other financial services are the cause of this financial meltdown. … There is no evidence to support Rep. Bachmann’s assertion that “minorities” caused the current financial crisis. Laws designed to open opportunities for equal access to credit does not require banks or thrifts to make loans that are unsafe or unprofitable. In fact, laws like the CRA mandate exactly the opposite. The law stipulates that CRA lending activities must be done consistent with safe and sound banking practices. Additionally, research clearly shows that the majority of the predatory loans that have led us to this financial mess were originated by non-bank financial institutions and other entities that did NOT have a CRA obligation and lacked strong federal regulatory oversight. Shifting the blame for the current economic crisis to laws that allow equal access and opportunity to communities of color is ridiculous.
One study that supports Ellison’s point was done in January by Traiger & Hinckley, a New York housing law firm. “Our study concludes that CRA Banks were substantially less likely than other lenders to make the kinds of risky home purchase loans that helped fuel the foreclosure crisis,” the report said.
That’s because financial institutions with active CRA compliance programs were less likely to make high-cost (or subprime) loans and were more likely to service the loans themselves rather than immediately sell them on the mortgage market.
That report’s conclusion is supported by a Federal Reserve Board report earlier this year that said, “overall mortgage loans to borrowers in lower-income neighborhoods by CRA covered institutions in their CRA assessment areas has increased from 13.4 percent of their assessment area mortgage loans in 1994 to 16.2 percent in 2006 … Further, Federal Reserve research suggests that CRA covered institutions have been able to extend such loans profitably and that the performance of such loans is about the same as that of other mortgage loans.”
Nonetheless, conservatives have kept the lie alive. In a post on FireDogLake, I questioned how talk show host Neil Cavuto has managed to keep his job at the Fox News Channel after saying, “I don’t remember a clarion call that said, ‘Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.’”
The truth is that there remains a persistent pattern of racial discrimination in lending. A report done in 2007 by the National Community Reinvestment Coalition, for example, found that in 2005 African Americans were at least twice as likely to receive high-cost loans as whites at the same income level in 171 metropolitan statistical areas. That’s not the law forcing business behavior. That’s business behavior in defiance of the law.
One of the institutions that has an “outstanding” CRA rating is Bank of America, which was healthy enough this year to swallow up the distressed mortgage lender Countrywide and the investment bank Merrill Lynch. Aggressive courtship of people of color communities clearly has not weakened Bank of America. But conservatives aren’t about to let the facts get in the way of a good story—you know, the one about the big, liberal federal government telling defenseless firms that they have to do business with shiftless “minorities,” then file reams of paper to bureaucrats in Washington to prove they did it.
Meanwhile, grassroots housing activists are working to strengthen the Community Reinvestment Act. One bill (H.R. 1289), sponsored by Rep. Eddie Bernice Johnson, D-Texas, would broaden the scope of the CRA to include financial institutions not currently covered by the law and would undo dilutions of the law that have taken place under President Bush. That bill hasn’t moved very far this year, but it’s a safe bet it will resurface in the next Congress.
As Congress struggles to figure out how to clean up the financial system mess, a growing consensus has emerged that a Wall Street bailout must be accompanied by a Main Street bailout. A Main Street bailout, moreover, will be ineffectual if it only addresses one side of the street. But the misguided belief that those who live on the “good” (read: “white”) side of the street don’t have a vested interest in equity and fairness for those on the “bad” (read: “black” and “brown”) side of the street is a hardy perennial. But this noxious weed must be exterminated from our political discourse now.