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Wednesday, October 15, 2008

In Defense of CRA

Opinion by Gregory Lobo Jost
It's getting a little ridiculous, to tell you the truth. According to the New York Times, an Iowa Representative has introduced legislation to repeal the 1977 watershed legislation that helped save neighborhoods across the country, including the those in the Bronx. Maybe it should come as no surprise that certain deregulation-minded conservatives who have been battling the Community Reinvestment Act for years (following the lead of former Senator Phil Gramm) would take the opportunity of a financial meltdown to once again go on the attack against CRA.

Fortunately, the Times editorial board has taken a stand today in support of CRA:

The charges do not hold up. First, how could a 30-plus-year-old law be responsible for a crisis that has occurred only in recent years? Then there’s the fact that the regulatory guidance issued under the reinvestment act and other banking laws actually impose restraints on the riskiest kinds of subprime lending.

In addition, subprime lending was not driven by banks, which are covered by the act. Rather, most subprime lending was driven by independent mortgage lending companies, which the act does not cover, and, to a lesser extent, by bank affiliates and subsidiaries that are not fully covered by the act. By some estimates, nonbank lenders and bank affiliates and subsidiaries may have originated 75 percent or more of the riskiest subprime loans.

The Times also cites a report by the Center for Community Capital at UNC Chapel Hill that shows much lower default rates in CRA loans than in subprime. A separate January 2008 study showed that banks who were subject to CRA, "were less likely to make a high cost loan, charged less for the high cost loans that were made, and were substantially more likely to eschew the secondary market and hold high cost and other loans in portfolio." In other words, they had better lending practices.

The real problem was from lenders not regulated by CRA (thanks in part to Phil Gramm) who went wild with their products. Often they didn't care if the loans were affordable because they were going to sell them off to be packaged into securities and sold to investors around the world, who were in turn duped by the ratings agencies. Plenty of people made a lot of money along the way without any real accountability. Since CRA-regulated banks are more likely to keep their loans on their own books, they actually lent with the intention of being repaid.

The lack of accountability inherent to the mortgage securitization process is what fueled the housing bubble and has brought us to this disastrous economic moment. The weakening of CRA in 1999 might be a better place to look to place a good chunk of the blame. The timing suggests it warrants a closer look.


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