12 February, 2009 (11:12) | economy, foreclosure, GOP, money, Republicans | By: Suzanne Reisman
As the nation deals with the ongoing foreclosure crisis, Republicans and conservative thinkers have increasingly blamed the situation on the Community Reinvestment Act (CRA). Not only is this tactic a smokescreen for the real problems that we face, but it is also patently false.
CRA requires banks with branches in disadvantaged communities stop discriminatory practices called redlining. Redlining means that no matter what the credit worthiness of a borrow is, if he or she lives within certain boundaries, banks summarily dismissed their loan applications. While redlining is technically illegal, banks continued to practice it anyway. CRA said that if you want to do business in a community, you need to find ways to responsibly invest in it. One way to do so is to find credit-worthy borrowers and provide them with mortgages. This worked very well for over 30 years.
Although the Act’s critics claim otherwise, CRA does NOT mandate that banks lend to disadvantaged borrowers who are not credit-worthy, nor did it lead to banks lowering their underwriting standards to comply with the law. According to an independent study of 2006 mortgage loan data conducted by the law firm Traiger & Hinckley LLP, CRA actually
deterred banks from engaging in the kinds of risky and subprime lending that brought on the foreclosure crisis. Specifically, the findings show that:
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1. CRA banks were significantly less likely than other lenders to make a high cost loan;
2. The average APR on high cost loans originated by CRA banks was appreciably lower than the average APR on high cost loans originated by other lenders;
3. CRA banks were more than twice as likely as other lenders to retain originated loans in their portfolios; and
4. Foreclosure rates were lower in metropolitan statistical areas with greater concentrations of bank branches.
Whether one agrees with CRA’s mandate that banks responsibly serve the communities in which they accept deposits or not, the data shows that CRA actually
deterred irresponsible lending. Further, the Treasury Department and the FDIC have emphatically stated that CRA is in no way responsible for the situation we are in today.
Instead of blaming CRA, we should extend CRA provisions to the independent mortgage companies and bank affiliates from which at least 75% of subprime loans originated. To continue to mislead the public on the benefits of CRA is not only immoral, but it would lead us into situation in which more – not less – of the irresponsible lending that created our current meltdown takes place.
