CRA Extension: Let's Focus On The Real Issues

We're waiting on pins and needles for the details of the next great idea for disposing of toxic assets on the balance sheets of big banks by enticing private investors to participate in working out those assets with a government whose word is no bond, and which blows with the prevailing winds. Let's hope the buyers get their money up front, then move to a country with no extradition treaty with the U.S. Otherwise, when Congress and/or the American people decide the deal was too good for private equity, they'll change it or punitively tax it retroactively

While we squirm with anticipation, we can't help but notice that Texas Rep. Eddie Bernice Johnson is pushing forward with a bill to extend the coverage of the Community Reinvestment Act to non-banks, such as credit unions and non-bank mortgage lenders. It's been something that liberal Democrats have been targeting for years, including Barney Frank. It's expected that Republican opponents will trot out the tired shibboleth that the CRA "caused" the subprime mortgage crisis. As we argued last December, that argument is simply not sustainable by anyone other than those who favor their Kool-Aid laced with cyanide. Even Sheila Bair and John Dugan agree on that point.

As The Washingtonn Independent noted last week, the Federal Reserve Board recently offered further support for our position.

Amid the ongoing debate over mortgage lending reform, a top federal regulator took a seat before Congress last week and debunked the myth — popular among conservatives — that a law encouraging loans to low-income communities has been largely responsible for the nation’s housing crisis.

“I can state very definitively,” Sandra Braunstein, director of the Federal Reserve’s consumer and community affairs division, said during a House Financial Institutions subcommitte hearing Wednesday, “that from the research we have done, the Community Reinvestment Act is not one of the causes of the current crisis.”

[...]

She cited a Federal Reserve Board analysis which found that, in 2006, CRA-covered banks operating in CRA-targeted neighborhoods accounted for just six percent of the risky, high-cost loans largely responsible for the housing crisis. Mortgage loans are considered high-cost when interest rates are at least three percentage points higher than those of conventional mortgages.

“So I can tell you,” Braunstein said, “if that’s where you’re going, that CRA was not the cause of this loan crisis.”

[...]

“Our analysis of the data finds no evidence, in fact, that CRA lending is in any way responsible for the current crisis,” Fed board member Elizabeth Duke said in a speech before representatives of the banking industry last month. “The CRA is designed to promote lending in low- to moderate-income areas; it is not designed to encourage high-risk lending or poor underwriting.”

Advocates are quick to point out that the CRA includes a safety and soundness provision that discourages bad loans. “It has a built-in check saying that [banks] have to lend in a way that’s good for the institution and good for the community,” said Danna Fisher, legislative director at the National Low Income Housing Coalition.

Of legitimate concern to banks, however, is that Johnson's bill would require regulators to determine whether lenders are adequately serving all minorities, not merely low income communities, as is the case under the existing CRA. The addition of new criteria will give extortionists consumer advocacy groups more ammunition to extract money concessions from banks that want to merge, acquire another institution, or branch. One more layer of cost of regulatory compliance at a time when pressures on banks' bottom lines are greater than ever. The fight should be over whether this extension of federal law is necessary in light of its costs, and the battle ought to be waged on statistical evidence, not on ideological cant.

There's plenty of fodder to feed a "healthy debate" about the extension of CRA to new areas and covered lenders. Raising straw men won't give credibility to the law's opponents.