On the Community Reinvestment Act

Phil Angelides, who chaired the commission that studied the cause of the 2008 financial market collapse, has a piece in the Atlanta-Journal Constitution putting to rest again any concern that the Community Reinvestment Act played a role in the collapse.

As the crisis unfolded, some blamed the Community Reinvestment Act as a driving force in the subprime mortgage disaster. That 1977 law was aimed at ending “redlining” by banks — the practice of denying credit to individuals and businesses in certain neighborhoods without regard to their creditworthiness. The law requires banks and savings and loans to lend, invest, and provide services to the communities in which they take deposits, consistent with bank safety and soundness.

The debate about the role of the CRA should now be over as the evidence presented in the commission’s report is clear. Indeed, nine of the 10 commissioners agreed that the CRA was not a factor of significance in the crisis.

As we detail in the report, many subprime lenders were not even subject to the CRA and the vast majority of subprime lending was unrelated to the law. For example, according to a 2008 analysis by two Federal Reserve economists who looked at 14 million loans made in 2006, only 6 percent of higher-priced loans (a proxy for subprime mortgages) were made to low and moderate income borrowers or in low and moderate income neighborhoods by banks and thrifts (and their subsidiaries and affiliates) covered by the CRA.

Importantly, another study by economists at the Federal Reserve Bank of San Francisco showed that loans made by CRA-regulated lenders were half as likely to default as similar loans made in the same neighborhoods by mortgage lenders not subject to the law.

Many people are unfamiliar with the Community Reinvestment Act. It, along with the Fair Housing Act, the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act, was designed to open up the housing and credit markets to African Americans and others who were systematically locked out in the past.

Angelides’ piece is important because the “poor blacks brought down the economy” meme has had more traction than it should have, given the evidence.

Also – check out Leadership Conference President and CEO Wade Henderson testimony on modernizing the Act from last summer.