Conservative Republicans and commentators have frequently blamed the housing crisis on the Community Reinvestment Act (CRA), which encourages banks to make loans in the low- and moderate-income areas where they operate. But a study to be released this week and a bipartisan commission, conclude that the federal law had little impact on the crisis.
The 1977 law, designed to prevent redlining in less prosperous neighborhoods, requires banking examiners to consider how many loans a bank has made in these urban neighborhoods and rural communities when financial institutions seek approval to open new branches, acquire other banks or merge.
Critics charged that the CRA forced banks to approve mortgages for poor, unqualified buyers who could not maintain payments and went into default or foreclosure, causing the housing market to collapse. That charge was also leveled often at the affordable-housing goals of Fannie Mae and Freddie Mac, federally sponsored enterprises that buy mortgages made by private lenders.
But the Democratic majority of the Financial Crisis Inquiry Commission established by Congress concluded in January that the 1977 law designed to prevent redlining was “not a significant factor in subprime lending or the crisis.” Ben Bernanke, chairman of the Federal Reserve, had made a similar statement two years ago, but the criticism continued.
Democrats on the bipartisan commission also found that the affordable housing goals “contributed marginally” to purchase of risky mortgages by Fannie and Freddie.
Because the CRA was prompted by evidence that some banks had practiced redlining and refused to make loans in urban black neighborhoods, Maurice Jourdain-Earl heard in those criticisms an accusation that minorities had caused the crisis — though he says race was rarely mentioned except by some bloggers.
“It’s more innuendo,” Jourdain-Earl says, calling the CRA “generically a code word” for lending to minorities who cannot afford home loans. He says the same applied to affordable housing goals. His firm, ComplianceTech, is releasing a study this week concluding that mortgage lending to African Americans and Hispanics has declined by 62 percent since the housing downturn began.
Rep. Barney Frank, D-Mass., then chairman of the House Financial Services Committee, has also said he detected racial code language in criticisms by some conservative Republicans. “In the wake of the affordable housing goals of Fannie Mae and Freddie Mac (and) the CRA, they get to take shots at poor people. And let’s be honest, the fact that some poor people are black doesn’t hurt, either, from their standpoint,” the Boston Herald quoted Frank as saying in 2008 at a local forum on foreclosures.
Grover Norquist, president of Americans for Tax Reform and a prominent conservative, told the Herald that he and other critics did not blame “low-income African Americans” he said had been victimized by the law, but rather Frank and Sen. Christopher Dodd, D-Conn., who then chaired the Committee on Banking, Housing and Urban Affairs, and has retired from Congress. The Herald labeled the CRA one of the country’s “minority-lending laws.”
In his new study on racial-ethnic lending patterns, Jourdain-Earl finds that Federal Reserve data show that 84 percent of mortgages purchased by Fannie Mae and Freddie Mac between 2004 and 2009 had been made to whites, with 8 percent going to Hispanics and 5 percent to African Americans.
For loans to comply with CRA, 68 percent went to whites, 15 percent to Hispanics and 12 percent to African Americans — hardly enough volume from minorities to cause the housing crisis.
Rep. Scott Garrett, R-N.J., new chairman of the House subcommittee on capital markets and government-sponsored enterprises, was among lawmakers who blamed the financial crisis on the CRA.
“The recklessness of government is the primary culprit here,” Garrett said on the House floor on Jan. 18, 2007. “For years Congress has been pushing banks to make risky subprime loans. You heard me right. It wasn’t the lenders on their own. Congress passed laws that said we’re going to fine you and we’re going to file lawsuits against you lenders if you don’t make risky loans.
“And using the authority of the Community Reinvestment Act, the big push for subprime mortgages began in earnest during the Clinton administration. Republicans aren’t completely lily-white here.…”
Garrett’s spokesman did not respond to e-mail and voice messages.