Don’t Repeal the CRA. Expand It.

In 1977, Congress passed (and President Jimmy Carter signed) the Community Reinvestment Act to reduce discrimination in lending.

Specifically, many banks were ignoring creditworthy, qualified borrowers in low-income, mostly-minority neighborhoods — a practice known as “redlining.” If banks were going to accept federal deposit insurance and access to the Federal Reserve’s discount window, the least they could do was make credit available to everyone who deserved it, regardless of where they lived or what color their skin was.

The CRA empowered regulators to “encourage” banks to lend to these borrowers — if they were just as likely to repay as borrowers receiving loans in other communities. The law didn’t specify how to encourage this behavior, so it took awhile for regulators to figure out how to enforce it.  

The 1990s were the peak of the CRA’s influence. Thanks to deregulations in 1994 and 1999, a merger wave swept through the banking industry. Regulators adopted stricter CRA rules in 1995 and blocked mergers between banks that had not lived up to those rules.

The merger wave died out by 2001, leaving regulators with fewer opportunities to enforce the CRA. New rules in 2005 and 2007 significantly reduced the number of banks that regulators had to fully evaluate under the CRA.

Meanwhile, the mortgage industry changed. Nonbank lenders took market share away from banks. These new independent mortgage companies didn’t need federal deposit insurance and therefore weren’t regulated by the CRA.

Thus, the rise of the housing bubble coincided with a decline in the influence of the CRA. That alone should be evidence enough to dismiss the CRA as a cause of the bubble (and the subsequent recession).

Blaming the CRA is even more ridiculous when you consider that every insider account from every major mortgage lender has indicated that they did what they did because it was enormously profitable, not because they were forced to.

In fact, of all the subprime loans made at the height of the housing bubble, only 6 percent were made by banks in the communities evaluated by the CRA.

That’s hardly surprising, given the increasing market share of lenders not regulated by the CRA. About half of all subprime loans were issued by these independent nonbank lenders.

Most of the risky lending didn’t even take place in low-income communities. About 60 percent of all subprime loans were issued to middle- and high-income borrowers and neighborhoods.

The vast majority of loan originations simply had nothing to do with the CRA.

Criticism of the CRA also hinges on the assumption that loans issued to satisfy the CRA were riskier than other loans. The numbers tell a different story.

Subprime loans issued in CRA communities “have performed virtually the same” as loans in similar communities outside the CRA’s jurisdiction, according to the Federal Reserve Bank of Minneapolis. Economists at the University of North Carolina tracked the performance of 50,000 CRA loans and found that they were 3.5 times less likely to default than subprime borrowers with non-CRA loans.

In fact, most foreclosures during the recession occurred in middle- or high-income communities, not low-income CRA communities.

While these facts let the CRA off the hook for the housing bubble and subsequent recession, they are damning evidence of the law’s insufficient response to the changing face of discrimination.

The growing power of unregulated lenders has undermined the CRA’s effectiveness. Within the same communities, they issued far more subprime loans than CRA lenders, and their loans were significantly more likely to result in foreclosure.

And discrimination still exists. A black household in Detroit with the same creditworthiness, employment, income, and demographics as a white household is twice as likely to face prepayment penalties, less likely to be approved for a mortgage, and pays an annual interest rate 1.1% higher, on average, than the white household.

Clearly, many communities still need — and deserve — safe, affordable lending. If we want to avoid another real estate crash, we cannot leave this task in the hands of unregulated nonbank lenders.

It’s time to extend the CRA’s reach beyond banks and thrifts, not to repeal it.

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This op-ed was published in today’s South Florida Sun-Sentinel, alongside an opposing view from Prof. Chandra Mishra of Florida Atlantic University. We were answering the question: “Were Community Reinvestment Act regulations really to blame for the mortgage crisis?”