Posted by
Damien Blaze on Wednesday, September 24, 2008 6:54:36 PM
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.