Firing Back on the CRA Libel

Conservative pundits and politicians have piled onto the excuse like shipwreck victims clinging to a passing log: The real blame for the current economic crisis lies not with anything they did, but rather with the 1977 Community Reinvestment Act—a successful Carter-era program designed to get banks to stop covert discrimination, and encourage them to invest their money in low-income neighborhoods.

It's always easy to tell when the cons are completely lost at sea. The lies get more absurdly preposterous—and also more transparently self-serving. But when they go so far as to openly and unapologetically latch onto race and class as an excuse for their woes (which this is, at its heart), you know they're taking on water fast—and scared of going under entirely.

You can hear the conservative commentators burbling this CRA fable from the Wall Street Journal to the National Review; from Rush to YouTube. Neil Cavuto put the essence of the argument right out there on Fox News: “Loaning to minorities and risky folks is a disaster.” See! It's all the liberals' fault for insisting on social justice!

Conservatives are twisting the facts beyond the breaking point to support their revisionist history. But don’t be fooled: the financial crisis was caused by conservative financial follies and bankers run amok and nothing more. Here are the basic myths they're trying to push about the CRA—and the facts that will enable you to fire back.

1. The CRA was a liberal boondoggle designed to con banks into funding housing for undeserving, unqualified minorities.

 
False. The Community Reinvestment Act of 1977 was the result of decades of disinvestment in poor and working-class neighborhoods. It was designed to put an end to "redlining"—a widespread practice in which banks refused to write mortgages for houses in certain neighborhoods, no matter who was applying or how creditworthy they were.

The Fair Housing Act of 1968 had made it illegal for real estate agents and banks to discriminate against homeowners on the basis of race. Redlining soon emerged as a not-so-subtle way to continue this discrimination, by declaring, ahem, certain neighborhoods as unfit to invest in. By 1977, the results of this practice were becoming all too obvious, so Congress stepped and gave lenders a choice: if you want the FDIC to insure your deposits, you need to knock off the redlining.

The CRA didn't force lenders to make riskier loans than they would have otherwise. It simply required that they take each applicant on his or her own merits, and give people in poorer neighborhoods the same fair chance at a mortgage that everybody else in town was getting. It wasn't about preferential treatment. It was just about basic equality.

2. The CRA forced banks to lower their standards and make loans to all low-income families and people with poor credit—and find banks that refused to comply.

 
No. The CRA has encouraged banks to lend fairly and responsibly for over 30 years. It does not impose fines. It does periodically examine FDIC-backed banks, and issues them a CRA compliance rating. A highly-rated bank must meet the financing needs of as many community members as possible, and must not discriminate against racial and ethnic groups or certain neighborhoods. However, a bank will not receive a high rating unless it is also maintains “safe and sound banking practices.”

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 as creditworthy as anyone else.

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

 
False. The CRA only applies to FDIC member banks and thrifts. Back in the 1970s, these institutions were responsible for most of the country's mortgage lending. But starting in the 1980s and on up to the present, we saw a huge boom in lending businesses—such as finance companies like Countrywide—that weren't banks, and didn't take deposits that required FDIC insurance. Thus, they didn't have any obligation to the CRA. And they were free to set their own lending standards, which were often far less cautious than those required of FDIC-insured banks.

4. The bulk of the "junk" loans that have been packaged into mortgage-based securities are CRA loans.

 
False. An analysis of Home Mortgage Disclosure Act (HMDA) data in the country's 15 biggest metropolitan areas found that 84.3 percent of the high-cost loans made in 2006 were originated by non-CRA lenders—including 83 percent of high-cost loans to low- and moderate-income individuals. The Federal Reserve notes that, across the country, non-CRA lenders were twice as likely as CRA lenders to issue subprime loans to vulnerable borrowers. Furthermore, the Fed also reports that responsible mortgages made by CRA lenders have about the same low rate of foreclosure as other traditional mortgages.

5. If the government had just set the lenders free to do their thing, the market would have prevented this. It's just another example of how government oversight always leads to market failure.

 
Wrong again, buckaroo. As explained just above, up to four-fifths of these loans were issued by financial institutions that operated with little or no federal regulatory oversight. In fact, in 2006, only one of the top 25 subprime lenders was a CRA institution. A few others were mortgage/finance company affiliates of CRA-covered lenders, but even these were separate businesses that didn't operate under CRA rules (including Countrywide, CitiMortgage, and Wells Fargo Home Mortgage). Likewise: the vast majority of the top 20 issuers of risky interest-only and option ARM loans were not CRA-affiliated lenders.

If anything, the CRA example proves—once again—that government oversight not only works; it's essential to maintain safe and sane capital markets.

6. The CRA is just another failed liberal handout program.

 
No. The benefits of CRA have been substantial. Citibank executive and former Treasury Secretary Robert Rubin recently estimated that the law has channeled upwards of $1 trillion into distressed neighborhoods across the country —including both inner cities and rural areas without much access to investment funds—without putting up any taxpayer money beyond what it takes to operate the CRA itself. In these areas, home ownership is up—and with it, the local tax base, which means more parks, more cops, more street repairs, and so on. There's more decent rental housing, too, because landlords can get loans for upgrades and improvements.

Small business ownership is also up. Low-income communities have become more attractive to outside investors, and more able to support community redevelopment efforts. And in places where people once cashed their paychecks at the convenience store and depended on payday loans, there are now full-service bank branches offering the same affordable financial services people in better neighborhoods take for granted.

The cons like to talk about the "ownership society." There is no ownership without access to capital. For 30 years, the CRA has been making private capital available to qualified people who want to bootstrap themselves into home and business ownership, and a secure place in the middle class.

7. OK—if it works so well, why do we still need it? Haven't the banks finally figured by now out that redlining was a stupid idea?

 
If only. The very fact that the conservatives are trying to blame the mess on the CRA is, in itself, ample proof that we still need anti-redlining laws on the books. Fifty years into the civil rights era, and they're still arguing that it should be acceptable to permanently exclude people from the capital markets on the basis of race and class. Different millennium, same ugly story: "See? This is what happens when you give money to minorities and poor people. You end up wrecking the country!"

In other words: no, they haven't learned their lesson; and yes, they still believe in redlining as much as they ever did. Racism is alive and well, and there are still plenty of Americans who would bring back housing discrimination in a heartbeat if the law allowed them to. Which is precisely why we can't allow them to.

8. If we can't blame the CRA, then who can we blame? How about the federal banking agencies, which outright told banks to go ahead and adopt risky lending practices? In particular, a 1992 Boston Federal Reserve Bank publication, Closing the Credit Gap: A Guide to Equal Opportunity Lending, told the banks that it was OK to adopt unsound lending practices.

 
Nice try, but still wrong. According to the National Community Reinvestment Association, the document cited above offered three new guidelines to lenders—none of which are applicable to the current subprime crisis.

The first guideline was that the lack of proper credit history shouldn't be counted as a negative factor for potential homebuyers. Banks could use other evidence to assess the borrower's payment habits, including the timely payment of rent, utility bills, and other scheduled loans. Borrows still need to prove that they're reliable; they're just allowed to use documentation besides a credit report.

The second was to remind bankers that some households with debt ratios above the standard 28/36 criteria might still qualify for home loans. This guideline is very conservative by today's standards. Many problematic subprime loans were granted to borrowers with debt-to-income ratios above 50 percent, which was in no way sanctioned by the 1992 guidance document.

The third was that lenders could count Social Security, second jobs, and other verifiable income streams as valid sources of income when evaluating loan applications. But most subprime loans failures aren't related to alternative income sources. The real problem has been with "liars' loans," in which the reported income streams are never verified at all.

9. Well, then...it must be Bill Clinton's fault, right? In 1995, Clinton changed the Community Reinvestment Act to allow the securitization of CRA and subprime mortgages. That's what started all this.

 
Talking point regurgitation at its worst. The 1995 revisions to the CRA only changed the way in which a bank’s CRA compliance is evaluated. They made no mention of mortgage securitization at all. Under the 1995 rules, banks are rewarded only for making mortgages in their communities, not for re-selling mortgages as securities.

10. OK, then—it's the Democratic Congress's fault! President Bush and Senator McCain tried to stop the subprime mortgage crisis, but Democrats blocked their efforts.

 
It's not lying. It's a gift for fiction. This one's actually made it into a TV ad. The claim is that 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, there's no pony in this manure pile. This bill would have done nothing to stop the rash of subprime lending that preceded the housing bubble. It only provided oversight for Fannie and Freddie—but it said nothing at all about the companies that issued subprime mortgages.

11. No serious conservative economist would have ever approved of the CRA.

 
False. In March 2007, Federal Board Chairman Bernanke—no liberal he—noted that CRA has helped institutions discover and enter new markets that may have been previously underserved and ignored by insured depositories.

These myths are floating around everywhere this week—a Big Lie that's being repeated so often that Americans may well start to believe it. The real objective of the "blame the CRA" campaign is to pre-emptively discredit any future progressive proposals that involve using government regulation to make the capital markets behave—and to get the free-market fundamentalist faithful back in the fold.

Time to fire back, and replace the Big Lie with some real truth.

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Sources:
National Community Reinvestment Coalition: CRA Myth and Fact [1]
Campaign for America's Future Fact Sheet: The Truth About the Community Reinvestment Act [2]
H/T to Steve Adamske