A quick spin around the Internet has brought me into contact with a growing conspiracy theory that is being fueled by a number of articles and blog postings about the root of the current crisis facing the mortgage banking industry. The guilty party, according to this conspiracy theory, is the Community Reinvestment Act of 1977 (or CRA for those who prefer acronyms).
In my opinion (and, remember, this is my opinion), I believe these theories are wildly off-base. As with many conspiracy theories, this notion can be easily deflated by the casual introduction of basic facts. So, get ready for a bit of bubble bursting.
CONSPIRACY THEORY: CRA was a ‘Carter era’ piece of legislation that forced ‘politically correct’ regulations on financial institutions. (Those quotes come from many of the texts dissing CRA.)
FACT: Although CRA became law in 1977, it was not through President Jimmy Carter's advocacy. CRA's critics cite the former president only because he was widely perceived as not being an effective chief executive, thus offering a guilt-by-association smear against the law.Â
Instead, CRA had its roots prior to Carter's election. It emerged as a result of grassroots lobbying to correct decades of redlining by deposit-taking banks and thrifts against low- and moderate-income communities. Non-depository mortgage lenders did not need to adher to the CRA regulations, so no one can blame their recent failures on that particular law.
The use of the phrase ‘politically correct’ is particularly demeaning in regard to CRA, since a disproportionately high number of African American and Hispanic communities benefited from the legislation. What is not stated is that these communities were long denied access to fair credit and lending practices because of redlining in urban markets (and let's not pretend it didn't happen). CRA was basically the banking equivalency of the 1960s civil rights legislation.Â
The use of ‘politically correct’ also casually ignores redlining's effects on predominantly white rural communities, which were also covered by CRA and which also enjoyed the law's coverage.
CONSPIRACY THEORY: CRA forced lenders to practice unsafe lending in order to meet federal requirements spelled out in the legislation.
FACT: The language of CRA did no such thing. If anything, CRA demanded that lenders find responsible solutions in meeting the credit challenges of their communities. The Office of the Comptroller of the Currency, in its official documents, clearly stresses that banks and thrifts need to proceed under CRA guidelines with policies that are ‘consistent with safe and sound operations.’
No lender was ever ‘forced’ by CRA or any legislation to originate a loan to a borrower with an unsatisfactory credit history. In fact, no bank or thrift ever lost their charter because of perceived problems with their CRA examinations.
This theory also ignores the troubling data that many of the subprime mortgages issued in the past few years went to borrowers who actually qualified for prime or Alt-A loans, but were instead steered into the toxic subprime territory. CRA did not force lenders into steering people with good credit into bad loans.
CONSPIRACY THEORY: CRA resulted in the pollution of the secondary market, which led to the current crisis.
FACT: The 1995 updates in the CRA provisions led to the securitization of CRA-related loans, which began in 1997. The collapse of the subprime market took place a decade after these changes started. No conspiracy theorist has been able to explain the 10-year gap between cause and effect.
If anything, the current crisis relating to the secondary market is largely based on a severe lack of due diligence and risk mitigation by those involved in the securitization process. That's not CRA's doing.
CONSPIRACY THEORY: As a law, CRA resulted in failure.
FACT: For the past three decades, CRA helped to revitalize economically troubled urban and rural areas by placing a strong focus on development that never existed prior to the legislation's passage. CRA was responsible for putting a new focus on financial literacy campaigns, and it inspired banks and thrifts to begin a new partnership with nonprofits and community development financial institutions that resulted in economic opportunities in many at-risk communities.
CRA, more than any federal legislation in recent history, also opened the doors to homeownership to many people who were previously denied access to this part of the ‘American dream.’ Quite frankly, that's not my definition of failure. But, as I stated earlier, that's only my opinion.
– Phil Hall, editor, Secondary Marketing Executive
(Please address all comments regarding this opinion column to hallp@sme-online.com)
