If ever there was a piece of legislation that deserves to be stopped dead in its tracks it is Rep. Jeb Hensarling's proposal to repeal the Community Reinvestment Act.
CRA has been around for 33 years and, without it, many hardworking, low- to moderate-income families never would have qualified for home loans and some inner-city neighborhoods now teeming with life might still look like war zones.
But CRA has long been a favorite punching bag of conservatives, and Rep. Hensarling, egged on by growing anti-government sentiment, is using the housing crisis to make the case for abolishing it once and for all. At a House subcommittee hearing in April, the Texas Republican argued that if banks and thrifts hadn't been forced to make loans to borrowers that they otherwise might not have made, the financial crisis might have been averted.
It's a demonstrably false claim, and the good news is that his bill won't get far in a Congress controlled by Democrats. One colleague on the House subcommittee on financial institutions and consumer credit, Rep. William Lacy Clay of Missouri, wondered aloud "what planet" Rep. Hensarling "has resided on the last 20 years." Another, Rep. Al Green of Texas, vowed "to fight to the end anyone who wants to roll back CRA."
That's not to say CRA is perfect, and as lawmakers work to craft a regulatory reform bill with teeth, examining whether CRA played any role in causing the crisis is certainly a worthwhile exercise.
But Rep. Hensarling seems to be lumping subprime loans in with CRA loans, and there is a difference. Did banks and thrifts make CRA loans during the boom years that later went bust? Absolutely, but these loans make up just a fraction of the loans that ended up in foreclosure.
Institutions like IndyMac, Washington Mutual and BankUnited failed not because they made too many subprime loans in low-income neighborhoods, but because they made too many loans to borrowers across the income spectrum for more house than they could afford.
It's worth noting, too, that roughly half of all the subprime loans originated in the boom years, including those in low-income neighborhoods, were made by nonbank lenders that never had to comply with CRA.
Eugene Ludwig, the CEO at Promontory Financial Group and a former Comptroller of the Currency, said in Congressional testimony in April that while there were many causes of the financial crisis-primarily too much liquidity and too little regulation-CRA was not one of them. Ludwig actually favors enhancing CRA, arguing that "vigorous application" of the law would attract more private investment into low- and moderate-income communities and could even help speed a recovery.
One of his key recommendations is to give lenders CRA credit for making loans to businesses that generate jobs in low- and moderate-income neighborhoods and additional credit if the loan is to a low- or moderate-income borrower.
Much of the emphasis on credit centers on home ownership, and Ludwig says we need to alter the conversation to focus on small-business growth. With job creation at the top of all policymakers' wish lists, that should be an idea even Rep. Hensarling could stand behind.
