From the
white paper on new regulations for the financial
sector:
Rigorous application of the Community Reinvestment Act (CRA)
should be a core function of the CFPA. Some have attempted
to blame the subprime meltdown and financial crisis on the
CRA and have argued that the CRA must be weakened in order
to restore financial stability. These claims and arguments
are without any logical or evidentiary basis. It is not
tenable that the CRA could suddenly have caused an
explosion in bad subprime loans more than 25 years after
its enactment. In fact, enforcement of CRA was weakened
during the boom and the worst abuses were made by firms
not covered by CRA. Moreover, the Federal Reserve has
reported that only six percent of all the higher-priced loans
were extended by the CRA-covered lenders to lower
income borrowers or neighborhoods in the local areas that
are the focus of CRA evaluations.
The appropriate response to the crisis is not to weaken the
CRA; it is rather to promote robust application of the CRA
so that low-income households and communities have access
to responsible financial services that truly meet their needs.
One of the most vocal proponents of the argument blaming CRA for
distorting the housing market was Peter Wallison of AEI. Wallison
summarized his arguments in a feature in our February issue
entitled “The
True Origins of This Financial Crisis.” I can’t help but
feeling that Wallison was one of only a handful of people the
administration had in mind when they wrote this section.
With that in mind, I have a few questions.
Is this accusatory language appropriate? Although I personally
don’t agree with Wallison’s narrative about the CRA because of
the evidence provided in
this Fed study, I think it’s a bit ridiculous to assert that
the argument that the CRA was a problem was “without any logical
basis.” If the CRA had in fact operated on a larger scale,
there is no doubt it would have introduced important distortions
into the market. Also, if you read his essay, Wallison considered
the CRA’s effects in conjunction with Fannie Mae and Freddie
Mac’s, which were much more damaging. By the way, this
regulations proposal
doesn’t do much to address the enormous failures caused by
Fannie and Freddie.
Furthermore, the argument that the CRA wasn’t forcing banks to
take on risky sub-prime loans hinges on the fact that sub-prime
loans issued by CRA-regulated firms and private actors have
defaulted at similar rates. There are two possibilities here: 1)
the CRA helped some low-income folks who otherwise wouldn’t have
been able to buy houses to procure mortgages during the boom. Now
some unknown percentage of those same folks are likely facing
underwater mortgages, have already defaulted, or are otherwise in
a tough spot. 2) The CRA got some mortgages to folks who would
have got them without the CRA anyways.
So the CRA was either potentially harmful or useless. Does it
make sense to include provisions for expanding a harmful or
useless measure in a regulatory overhaul?
