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.