Editorial: Don't blame economic meltdown on Community Reinvestment Act

Staff Writer
Mount Shasta Herald

The intensity of blame game being waged over the financial crisis requires a constant supply of new targets. Already, it has been blamed on Phil Gramm, Barney Frank, Bill Clinton, Alan Greenspan, the SEC, greedy bankers, spendthrift borrowers and affordable housing advocates.

The latest target is a well-regarded federal law that has been on the books since 1977: the Community Reinvestment Act. According to the current line in the conservative media echo chamber, the CRA forced banks to give subprime loans to minorities in poor neighborhoods who are credit risks. Those irresponsible poor folks couldn't keep up their payments and now the economy is going down the tubes.

If you're not turned off by the undertone of blaming the victims; if you're not suspicious about blaming a 1977 law for shaky subprime loans that didn't begin to appear until 2004; and if you're willing to believe that the Bush administration used heavy-handed regulation against banks on behalf of poor people, you might find this explanation plausible - as long as you don't know much about the CRA.

Here are three things you should know about it:

1. The CRA doesn't require loans to be made; it requires that the same rules apply to people seeking mortgages in poor neighborhoods as those buying in other neighborhoods. "Nor does the law require institutions to make high-risk loans that jeopardize their safety," according to the Fed's CRA Web site, "To the contrary, the law makes it clear that an institution's CRA activities should be undertaken in a safe and sound manner."

2. The CRA only applies to banks and thrifts whose deposits are insured by the FDIC. Mortgage companies like Countrywide Financial and fly-by-night operations aren't CRA banks. Half of the subprime mortgages were made by companies that weren't covered by the CRA, and another 30 percent were written by organizations only loosely affiliated with CRA banks.

3. The CRA only works in designated low-income neighborhoods. As Rep. Jim McGovern noted in Hopkinton Wednesday, the CRA has nothing to do with a mortgage on a $500,000 home in Hopkinton, let alone a $800,000 home. This borrowing binge was a nationwide phenomenon.

Yes, some low-income, urban neighborhoods have been especially hard hit by foreclosures, but poor families live closer to the edge and are always the first hurt when the economy turns. But because CRA banks operate under more supervision, the failure rate for those mortgages has been lower, and those mortgages were less likely to be bundled into the mortgage-backed securities that have caused most of the headaches on Wall Street.

The CRA is declared innocent. Next target?

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