WASHINGTON — A plan by Rep. Jeb Hensarling to repeal the Community Reinvestment Act reignited a heated debate at a House subcommittee hearing on Thursday on the 33-year-old law's role in the financial crisis.
The Texas Republican, the lead GOP member on the financial institutions subcommittee, introduced a bill to roll back the CRA at the start of the hearing, arguing it was a partial cause of the housing crisis and was the source of excessive compliance costs for banks.
"Do you really have to force a bank to make a profitable, creditworthy loan?" Hensarling said. "And if not, are we forcing them to make loans to a universe of people that they may not otherwise make? And these loans may not be financially sound loans. And indeed, they may be loans that helped contribute to our financial crisis."
He was quickly assailed by Democrats, community activists and former regulators, who said the CRA did not cause the crisis and remained an important way to ensure banks lend to everyone in their communities.
"To blame the CRA is to let rascals go," said Rep. Al Green, D-Texas. "Not anyone can show me where the CRA mandated subprime loans with prepayment penalties that coincided with teaser rates. Show me where the CRA required that we have collateralized debt obligations, known as CDOs. Show me where the CRA promulgated and promoted credit default swaps. Show me where the CRA caused negative amortization."
Green vowed to "fight to the end anyone who wants to end the CRA. … I will not allow the clock to be rolled back."
Democrats argued that the vast majority of the risky loans that led to the financial crisis were made to middle-income borrowers and said CRA loans have performed well. "It had nothing to do with CRA … the fact is only 6% of all subprime loans, hybrid loans, were under CRA and that is assuming all of them went under. You see what a small portion they were," subcommittee Chairman Luis Gutierrez said.
But Hensarling said it was not the volume of CRA loans or their performance that contributed to the crisis but the goal of the law to promote lending.
"I question the rationale for the law today," Hensarling said.
Eugene Ludwig, the chief executive of Promontory Financial Group LLC and a former comptroller of the currency, argued that the CRA had nothing to do with the crisis and instead most of the risky loans that led to the crisis were made to upper and midlevel borrowers.
"There are many causes of the horrible crisis we've lived through … the simplest answer is there was too much liquidity and too little serious regulation in the last decade," Ludwig said. "The one thing it is not about, is it is not about CRA. … It's sort of like blaming the sheep for the fact that there were wolves here."
At times, the hearing even became personal, with one witness accusing Hensarling of essentially being bought by the banks.
"In my opinion, nobody shakes down the banks better than members of Congress," John Taylor, the president of the National Community Reinvestment Coalition, said to Hensarling. "You yourself have received over $200,000 in contributions from financial institutions over the past two years and that goes directly to you for keeping your job. That is not what community organizations do. … So I'd be careful about where you point your finger and accuse people of shakedowns."
Hensarling shot back by accusing the coalition of working with banks.
"Have you, your organization, or any affiliate ever requested or received a contribution from a federally insured depository institution subject to CRA?" he asked. "Have you, your organization, or any affiliate ever received a low market loan from a federally insured depository institution subject to CRA?"
Taylor responded that he had good relationships with some banks but that "we do not take any operating funds from banks."
Lawmakers also responded.
"I find it incredulous that my colleague from Texas questioned the need for CRA after what we've just experienced as far as the financial meltdown. … The situation cries out," Rep. William Lacy Clay, D-Mo., said. "I'm just curious what planet my colleague has resided on the last 20 years."