What is the Community Reinvestment Act?

The origin of this act dates back to the Carter administration in 1977. The motivation as stated by Democratic Senator William Proxmire on the Senate floor in 1977, was "to eliminate the practice of redlining by lending institutions."

What is redlining?

Redlining is really a description of a normal business practice. Banks in low-income areas take local deposits and, as banks do, lend the money to sound credit risks in the expectation that the loans will be paid back with interest. Unfortunately, poor and minority communities tend to have a dearth of people who are sound credit risks. As a result capital from these low-income areas is lent to more well-to-do neighborhoods which leaves poor and minority communities starved of housing and capital.

Is this a discriminatory practice? Yes, it is. It is not, however, discriminatory by race or class. It is a practice that discriminates between providing a service and making a profit or making money-losing decisions and going out of business. Nevertheless, redlining was widely seen as the cause of housing disparities between white and black Americans.

Would have been better for those banks to have avoided providing any services in communities to which it could not reasonably lend? I’d say no. Your mileage may vary.

The 1977 Community Reinvestment Act followed on the heels of the 1964 Civil Rights Act, the Fair Housing Act of 1968 and the Equal Credit Opportunity Act of 1974. It appeared to be a way to increase the level of home ownership among black Americans. On its face it’s a laudable goal.

Initially, the CRA was supposed to lend to poor and minority areas in a way "consistent with safe and sound lending practices." That latter key proviso was ignored as CRA was implemented, and the CRA forced banks and savings institutions to make loans to poor, often un-creditworthy minority borrowers. Good intentions or not, there’s still no such thing as a free lunch.

As stated in Investors’ Business Daily:

Banks were required to keep extensive records of their minority lending practices. Those that didn't pass muster could be denied the right to expand their branches, merge with other banks, or boost lending in new markets.

Regulators didn't need to do much policing; they let that job fall to radical community groups, such as ACORN and NACA, which siphoned literally billions of dollars from banks and lent the money in poor communities.

It wasn't entirely altruistic.

The community groups booked thousands of dollars in fees for every loan. And loans often required recipients to become active in radical causes — what's today called "community organizing."

If a community group decided a bank was operating in bad faith, it could affect the bank's "CRA rating" — the scorecard for how well it was doing as a minority lender.

Banks became pliable, easy targets. No bank CEO wanted to be mau-maued as an enemy of the poor. They became shakedown targets, channeling billions of dollars to groups that had, at best, meager results to show for it.

That's how it began. Later, in the Clinton era, Fannie Mae and Freddie Mac got involved — buying up bad loans from banks, and securitizing them for sale on world markets. The seeds of the subprime meltdown were planted.

The CRA led to a housing boom based on shoddy loan practices. Once the bubble inevitably burst, the entire house of cards collapsed. Now the American economy is staring into an abyss.

The American economy is you and me, and the road to Hell is still paved with good intentions.

• How can loaning money to people who are incapable of paying it back be called risky? Where's the risk? Does not the term risk imply that there is some uncertainty about whether the money will repaid? It seems to me that there was a certainty that the money would not be paid back.
  
  
• How can risk be spread with complex financial instruments when there is no risk? It seems to me that all of these arcane financial arrangements boil down to divvying up sure losses.
  
  
• How can anybody be deluded enough to believe financial obfuscation would insulate them the mounting, certain losses? It seems to me to be wishful thinking at best.
  
  
• If the allegedly intelligent, financial "masters of the universe" did understand that they weren't getting the money back, was the plan all along to stick the taxpayers with tab? It seems to me that that would be fraud.
  
  
• Is Barney Frank really serious about this crisis? It seems to me that by "making sure that no one loses their house" he plans on providing free houses to those who aren't paying their mortgage.