Political leaders and Congress would be making a grave mistake if they attempt to weaken the Community Reinvestment Act.
Current estimates are that nearly $60 billion has been invested in low- and moderate-income neighborhoods as a result of this law.
Federal Reserve Board Governor Larry Lindsey maintains that "CRA successfully delivers $4 billion to $6 billion a year to low-income areas without employing a large bureaucracy."
Congress should ask itself how much worse off our poorer neighborhoods would be without that investment. If lenders have no obligation to lend in these distressed areas, where will the money come from? Increased federal support? Hardly.
What logical reason exists to eliminate or weaken this valuable law? CRA doesn't require taxpayer funds, and there is no congressional budget line item to fund bank regulatory agencies. It only requires safe and sound lending to creditworthy borrowers.
CRA is good law and good business. Bankers like Richard Rosenberg, chief executive of BankAmerica, and Hugh McColl, CEO of NationsBank, both have been outspoken on the merits of CRA. In fact, those lenders from across the country with the most community reinvestment lending experience speak positively about the act.
Consider also what Federal Reserve Board Chairman Alan Greenspan said: "CRA can be a safe, sound, and profitable business. This seems to have been proven over the years of our experience."
Fannie Mae head Jim Johnson, referring to the CRA and other fair-lending laws at the National Association of Home Builders Conference, said, "It would be a mistake for housing policy reform to diminish the goals of these landmark laws."
Consider the chief beneficiaries of the Community Reinvestment Act. CRA directs lenders to serve those folks who are working their way out of poverty. They are folks on their way up the economic ladder. Many are minorities, most are Caucasian, but all share a common dream of owning a home or a business.
Their success in accessing credit results in a home being purchased, new jobs or small businesses created or some other activity that supports local industries such as the home-building trades, appliance sellers, and others. Their success in moving up the ladder adds tax revenue to government coffers in the form of real estate and employment taxes. This is a law that benefits all Americans, requires no taxpayer revenue, and produces measurable results.
Some critics of CRA complain that the law forces banks to take bigger risks by lending to poorer people. This is simply not true. Lenders are required to make sure such loans are safe and sound.
High default rates and drastically poor performance by low-income and moderate-income borrowers would be a good reason to scuttle CRA-type lending. But such is not the case. There are a plethora of studies by Freddie Mac, the Chicago-based Woodstock Institute, and others which repeatedly show that loans to working-class people for home purchases perform as well or better than other segments of a lender's portfolio. Bank of America also reports its CRA-type loans are performing as well or better than other loans.
Consider also what Fair, Isaac & Co. concluded when they considered "income" as one of the variables for extending credit. They found that income was negatively correlated with loan performance. History shows that the higher the borrower's income, the higher the default rate.
If we eliminated CRA, could we count on lenders to serve working-class credit needs? We already have a natural test of that question. Lending institutions that have no CRA obligation, mortgage companies in particular, do a dramatically poorer job in serving working-class neighborhoods.
The National Community Reinvestment Coalition released a study in January 1995, titled "America's Worst Lenders," which showed that mortgage companies dominated the ranks. Their excuse? "There's no law that says we have to serve those communities."
None of us support unnecessary paperwork. Lenders are critical to the overall health and well-being of any community. Supporting and nurturing positive community-lender relationships is where most of us are at. If there was a way to reduce the paperwork burden and at the same time hold lenders fully accountable, few folks I know would oppose such an effort. Indeed, the new proposed CRA regulations include a paperwork reduction plan. We support this effort.
Let's acknowledge those lenders who have proved that CRA-type lending is profitable, can be done safely and soundly, and is good public policy. The need for capital for homes and small businesses will continue to grow.
Community reinvestment is not about liberal politics. It is first and foremost about capitalism, ensuring that any one who is willing to work hard, maintain good credit, and hold a job can equally participate in the American dream.
