The Community Reinvestment Act (CRA)

The first CRA bill was passed in 1977, under the Carter Aministration, and was pretty much an outgrowth of the earlier Great Society of LBJ and Civil Rights. IT's immediate justification was anti-discrimination regarding bank lending in low income, minority neighborhoods and intended to eliminate a common banking practice of "redlining." Redlining consisted of avoiding lending in these neighborhoods, according to the banks, because of poor credit performance, high rates of crime and the general higher risk found there.

The "counter-argument" was not to deny the statistical evidence regarding these factors, but to insist that "credit worthiness" needed to be based on individual performance, rather than neighborhood performance and to do otherwise was to continue a system of segregation that perpetuated the very factors the banks pointed to as reasons for non-lending.

Over the years, particularly as African Americans gained seniority in Congress, as a result of re-election, and rose in the Congressional leadership (particularly in the House of Representatives and the Democratic Party), the original CRA legislation was from time to time stregthened. Pressure was bought to bear on the Federal Reserve to, in turn, pressure the banks under their jurisdiction into paying greater attention and they responded by establishing offices in the various Federal Reserve regional banks to perform studies, coordinate banks and civic groups (such as ACORN)to encourage more communication, and to publish guidelines for the banks to use, which used "alternative measures of creditworthiness" for low-income, minority loan applications (e.g. combining household income although everyone in the household might not be part of a "traditional family," etc.).

As I understand it, it was not however, until the Clinton Administration and the growing merger mania and push for deregulation and expansion of national banks, that CRA compliance went from something approaching "voluntary," to meaningful penalities for non-compliance. Much of what had heretofore been informal became formal. Reports were required to measure compliance via 12 "assessment critieria," and banks were "scored" on the degree of compliance. At least one major bank expansion (The Continental Bank of Illinois request to purchase a smaller Arizona bank) by a Federal Reserve ruling that held Continental Bank to be CRA non-compliant.

This simultaneous expansion, but consolidation through mergers and acquisitions, in the wake of the failure of numerous Savings and Loan banks earlier created new opportunities for financial services. The intense competition created through the expansion and consolidation was a factor in the drive for increasingly "innovative products" (perhaps an equal contribution in this drive was the advancement of information technology which allowed the real-time sharing of information, the gathering of large data bases, etc.).

Personally, I would contend that much of this was also driven by the now middle-class hunger for credit and a growing awareness within the financial services industry that a great deal more money could be made by pressuring the more numermous "customers" living on the margins, than the "fat cat on the hill" who had the resources and education to avoid what become essentially a variation of "pay-day lending."

In a 1990's Michael Moore documentary, Moore interviews economist and real estate Professor Elizabeth Warren (now Chairwoman of the Financial Crisis Inquiry Commission). Warren relates the story of her conducting a seminar for banking executives at Citigroup on how they may avoid consumer risk through a more careful screening of credit applicants. As she wound up the several hour presentation, the senior executive in the room spoke up, telling her: "That's very interesting Professor Warren, but it is from those people living on the edge of bankruptcy that we make most of our money."

Thus, far more than the CRA Program and "banks being forced to lend to low-income minorities who were poor risks," I'd suggest that banks found they could not lend fast enough.

Studies since the economic crisis in the Fall of 2008 conducted by the Federal Reserve, the FDIC, several Universities and numerous other independent sources tend to uphold this conclusion.

In a December 4, 2008 speech to the Consumer Federation of America, Shelia Bair, Chairwoman of the FDIC (and a Bush appointee), stated: "I think we can agree that a complex interplay of risky behaviors by lenders, borrowers, and investors led to the current financial storm. To be sure, there's plenty of blame to go around. However, I want to give you my verdict on CRA: Not Guilty."

Bair points out that during the "bubble" of subprime mortgages from 2004-2006 (I'd suggest 2003-2006), only about 25% of the subprime loans (termed "higher-priced loans," since increased risk increased the loan fees and interest rates) were made by CRA-covered banks. Three-fourths of the subprime loans made during this period were made by private independent mortgage companies and large-bank affliates not covered by CRA rules.

The other studies back up Bair's conclusion. A Fed study showed that there was no significant difference in the foreclosure rate in low-income, minority neighborhoods, covered by the CRA, than in low-income, NON-minority neighborhoods.

Another study showed that mortgages made last...just before the crash...failed first, as lending standards decreaded, decreases unrelated to the CRA. And, as Bair concluded in her speech: "And the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth...pure and simple.

In the next post...we'll explore banking deregulation.