The Truth about the Community Reinvestment Act

Conservative commentators in the Wall Street Journal and the National Review, and on YouTube are spreading the myth that the Community Reinvestment Act, a law designed to eliminate discriminatory banking practices, caused the current financial crisis. In the words of Fox News’ Neil Cavuto, “Loaning to minorities and risky folks is a disaster.”

Conservatives have twisted the facts to substantiate their revisionist history. But don’t be fooled: the financial crisis was caused by conservative financial follies and bankers run amok and nothing more.

Myth: The Community Reinvestment Act forced banks to make loans to all low-income families and people with poor credit, fining banks that refused to comply.

Fact: The Community Reinvestment Act has encouraged banks to lend fairly and responsibly for over 30 years. The Community Reinvestment Act does not impose fines; it periodically examines FDIC-backed banks and issues them a CRA-compliance rating. [Community Reinvestment Act] To receive a high rating, banks must meet the financing needs of as many members of their community as possible and must not discriminate against racial and ethnic groups or certain neighborhoods. However, a bank cannot receive a high rating unless it is also maintaing “safe and sound banking practices.” [Community Reinvestment Act] In other words, the CRA requires banks to lend to working-class families and people of color, but only when those people have been deemed credit-worthy.

Myth: The housing bubble burst when too many people with home loans mandated by the Community Reinvestment Act failed to make their mortgage payments.

Fact: More than half of problematic sub-prime loans made in the last few years were issued by banks that are not regulated by the CRA. [U.S. House Committee on Financial Services] The CRA applies only to financial institutions that are insured by the FDIC, but not to independent mortgage companies such as Countrywide. In fact, non-CRA lenders were twice as likely as CRA lenders to issue excessively expensive subprime loans to vulnerable creditors. [Federal Reserve Bulletin] Responsible mortgages made by CRA lenders have a low rate of foreclosure similar to that of traditional mortgages. [Federal Reserve]

Myth: In 1995, Bill Clinton changed the Community Reinvestment Act to allow the securitization of CRA and subprime mortgages.

Fact: The 1995 revisions to the CRA changed only the way in which a bank’s CRA compliance is evaluated; they made no mention of mortgage securitization. [60 F.R. 22156] Under the 1995 rules, banks are rewarded only for making mortgages in their communities, not for re-selling mortgages as securities.

Myth: President Bush and Senator McCain tried to stop the subprime mortgage crisis, but Democrats blocked their efforts.

Fact: Bush and McCain supported the Federal Housing Enterprise Regulatory Reform Act of 2005, which would have created a new government agency to oversee Fannie Mae and Freddie Mac and other federal housing programs. However, the bill would have done nothing to stop the rash of subprime lending that preceded the housing bubble because it provided oversight for only Fannie and Freddie, not for the companies that issued subprime mortgages. [GovTrack]