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Stop Telling Canards About CRA

Here we go again. Over the holidays, another group issued a report seeking to discredit the Community Reinvestment Act, passed in 1977 to encourage regulated financial institutions to meet the credit needs of their communities in a safe and sound manner.

A paper published by the National Bureau of Economic Research purports to prove that CRA caused banks to make risky loans. But a careful read of the paper reveals a total lack of understanding of the timing and process of CRA examinations.  For this and other reasons, the paper fails to demonstrate that CRA has any negative effect on banks' lending behavior.

The paper would not be worth a mention except for the danger that its content could be used to support misguided policy and practice as we emerge from the foreclosure crisis. Indeed, the American Enterprise Institute quickly picked up this report to support its stock “government-did-it” narrative.

A review of the paper by housing finance researchers published this week by the UNC Center for Community Capital clearly points out the fundamental flaws in the authors' methodology and conclusions. It's available for anyone interested in a detailed analysis.

As a former banker and former bank regulator, we were struck by the authors' complete misconception of how CRA actually works. In particular, the paper's entire thesis is built on the premise that lending three quarters just before and after a CRA “exam date” is relevant to the bank's CRA rating.  As we know from experience, lending in those quarters is almost certain to be too late to have any impact.

Multiple studies have shown that CRA did not drive the risky lending that led to the subprime crisis. Studies by researchers at the San Francisco Federal Reserve Bank and UNC Center for Community Capital have demonstrated that CRA encouraged safe and sustainable lending that expanded homeownership without incurring the high default levels experienced by the unregulated, non-CRA-covered loans.Federal Reserve economists have demonstrated that only 6% of the high-cost, high-risk mortgages made at the height of the subprime boom were made by banks in their CRA-eligible markets.  

As we begin a new year and continue the important work of rebuilding a strong, safe and sustainable housing market and economy, let's leave behind this tired debate and affirm what we know to be true: the Community Reinvestment Act has played an important role in sustainably expanding home lending to many Americans and communities.

It doesn't take extensive research or a degree in economics to understand that expanding home lending that is safe for both borrowers and lenders promotes a vibrant housing market, strong neighborhoods and a stronger economy. So let's move on, shall we?

Ellen Seidman was director of the Office of Thrift Supervision from 1997 through 2001 and has served at the U.S. Treasury, White House and Fannie Mae.  Mark Willis, resident research fellow at New York University's Furman Center for Real Estate and Urban Policy, headed community development banking at JPMorgan Chase until 2008.



(7) Comments



Comments (7)
The most in depth analysis of CRA is provided by Oonagh McDonald, Fannie Mae and Freddie Mac: Turing the American Dream into a nightmare, Bloomsbury Academic, London and NY, 2012. The mortgage losses are taken from published financial reports. As stated, there is no way to trace what loans counted for CRA and whether the first or the second loan subsequently defaulted. But all the CRA history prior to the last decade is both wrong (bad data) and irrelevent as the huge increase in commitments was extorted to facilitate bank mergers allowed by the Reigle-Neal Interstate Banking and Branching Act of 1994.
Posted by kvillani | Thursday, January 17 2013 at 12:40PM ET
Bartharness, you're preaching to the choir. I'll take it a step further -- I think the while "blame the CRA" mantra is deliberately racist. The subtext is obviously "it's not your fault, it's all because of those minorities in the ghetto who borrowed more than they could afford to pay back." Just like "voter fraud" and "border security."
Posted by PJSCHGO | Thursday, January 17 2013 at 12:23PM ET
PJSCHGO: It's part of a larger program. The financial crisis put the lie to a lot of their pet theories (Efficient Market Theory, etc.) so rather than give up their belief systems, they come up with crackpot ideas on how it was all government's fault. Propaganda mills such as the American Enterprise Institute start from the premise that every problem that has ever existed, at any time in human history, was caused by government action. It's part of a campaign for smaller government. Why do they want smaller government? To satisfy their rapacious greed (lower taxes) and the same reason Al Capone wanted smaller government (so businessmen can commit crimes without fear of repercussions).
Posted by bartharness | Thursday, January 17 2013 at 12:11PM ET
Where does that $4 trillion in CRA commitments number come from? I can find data showing the TOTAL U.S. mortgage market in 2008 was $14.6 trillion, and other accounts which show that the overall percentage of (all) subprime loans PEAKED at 14% of the market in 2006, so at most the total SUBPRIME (not just CRA) market was only about $2 trillion. There's also plenty of evidence that 94% of all subprime loans were from non-CRA regulated lenders (or not in CRA covered areas). That means CRA regulated loans were at most only about $125 billion. Also, CRA loans performed BETTER than other subprime loans. Just do some basic research and look at the math and it's pretty obvious CRA is not a primary cause of the housing crisis. If you have a source of total CRA loan volume and default rates, I'd love to see it.
Posted by PJSCHGO | Thursday, January 17 2013 at 12:09PM ET
Mr. Villani: Where does the "$4 trillion in CRA commitments" figure come from? And how about providing me the name of a single bank that got a "Needs To Improve" or "Substantial Noncomplince" CRA rating because they didn't provide sub-prime mortgages? Surely, with over 7000 banks in this country, there must be at least one example.
Posted by bartharness | Thursday, January 17 2013 at 11:55AM ET
it is extremely difficult to prove the damage done by the CRA statistically during the sub-prime crisis, just as it is extremely difficult to show any benefit. But $4 trillion in CRA commitments accounts for most bank originations during the sub-prime lending debacle that were the source of almost a trillion dollors in subsequent first and second lien credit losses spread throughout the financioal system.
Posted by kvillani | Thursday, January 17 2013 at 11:28AM ET
Seriously?!? How does a 35 year old law just all of a sudden crash the global housing market? A law which only governs a tiny fraction of the loans which defaulted. A law only in effect in the United States, yet somehow is supposed to be responsible for a global housing crisis. Anybody who buys into this crap is an idiot.
Posted by PJSCHGO | Thursday, January 17 2013 at 11:24AM ET
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