In yet another sign of the Apocalypse, Sheila Bair and I agree on something. Last Thursday, speaking before a consumer advocacy group (her favorite turf, other than any Congressional subcommittee chaired by Barney Frank), Ms. Bair "vigorously" refuted the allegation that the Community Reinvestment Act was a cause of the explosion of subprime mortgage loans that led to the current credit crisis and economic meltdown.
"Point in fact," she said, "only one in four higher-priced first mortgage loans were made by CRA-covered banks during the hey-day years of subprime mortgage lending. The rest were made by private independent mortgage companies and large bank affiliates not covered by CRA rules."
And "Let me ask you," she proceeded. "Where in the CRA does it say to make loans to people who can’t afford to repay? Nowhere." The facts are simple, Bair said. The lending practices that are causing problems today were driven by a desire for more market share and revenue growth, not because the government encouraged certain lending practices.
Some conservative pundits and "intellectuals" have been promoting the idea that CRA "forced" lenders to make such loans.
Mark Hillman, a former majority leader in the Colorado state Senate tells a different tale. "Through CRA, banks were strong-armed to make risky loans and threatened with fines of up to $500,000 per violation if they didn’t reach government quotas," he wrote in an op-ed published in late October. "Banks were encouraged to hire 'community groups,' like ACORN, to find 'qualified' borrowers."
Bair said CRA has always recognized there are limitations on the potential volume of lending in lower-income areas due to "safety and soundness" considerations, and that’s why the CRA never set out lending targets or goals. However, the CRA isn’t without imperfections, and now is the time to put more emphasis on the qualitative aspects of lending in CRA examinations, she said.
OCC Comptroller John Dugan, who, unlike Ms. Bair, considers himself more of a bank regulator than a consumer advocate, made similar points in a speech last month. I tend to take Dugan more seriously than Bair on these issues, because he's got less of a pro-consumer, anti-bank bias and isn't so obviously angling to curry favor with Barney Frank and the incoming Obama administration.
I find the argument that the CRA caused, or even substantially contributed to, the subprime mortgage crisis to be not only unconvincing, but counterproductive to any movement to "correct" the real abuses of the CRA. I was an in-house counsel for a large thrift institution when the CRA was enacted, and had primary responsibility for considering its impact on the operations of the thrift. One of the expected impacts was that consumer advocacy groups would use it to hold branch and merger and acquisition applications hostage by unjustifiably challenging those applications until the applicant "paid off" the advocacy group with a "contribution" to some housing-related fund or project of the group. That expectation was shown to be justified.
That said, the CRA did not "require" a bank to abandon sound underwriting requirements and make loams to borrowers who had no hope of repaying the loans. I served on a loan committee during the first four years of the CRA's existence, and I can testify that such a consideration was never raised. As to the application of the CRA in the decade of 1995 to 2005, a period singled out by critics for much of the CRA "abuse," I've polled many compliance officers of commercial banks and thrifts on this contention, and every single one of them scoffed at the notion. Not that university professors and political ideologues with absolutely no experience in mortgage lending or consumer lending will be deterred by the views of those who have actually served in the trenches. Still, non-Kool-Aid drinkers might take note.
There's enough to dislike in the CRA, and there are sufficient legitimate reasons to seek to reform it, without raising bogus "problems" that do no more than rally supporters and discredit opponents. When you make Sheila Bair look like a disinterested observer, you're not doing yourself any favors.