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Law for Poor Didn't Cause Meltdown


Accomplished Googlers can probably find the original talking points off which dozens of conservatives made essentially the same case: The Community Reinvestment Act of 1977 caused the financial crisis. For example, a Wall Street Journal editorial lumped CRA together with far more plausible causes of the meltdown. This liberal-inspired law, it complained, "compels banks to make loans to poor borrowers who often cannot repay them."

In fact, the CRA had about zero to do with today's problems. Its accusers are "know-nothings," Aaron Pressman writes on He says the law "was actually weakened by the Bush administration just as the worst lending wave began."

The Community Reinvestment Act requires federally insured banks and thrifts to lend in the low-income neighborhoods where they take deposits, but consistent with safe banking practices. It was created to stop redlining, the practice whereby banks refused to lend money in certain areas — read minority neighborhoods — regardless of their residents' credit histories.

The most obvious clue that CRA did not cause the mess is its date. The musical "Annie" opened in 1977, and the Eagles' "Hotel California" was the No. 1 song. That was a long time ago, 31 years to be precise. If the CRA created this time bomb of lousy loans, why didn't it go off in 1980 or 1996?

The writing of crazy mortgages for low-income people — loans with exploding interest rates, brutal fees and no demands for documentation — was a post-2003 phenomenon. In 2004, the Bush administration actually slashed CRA regulation, freeing small banks and thrifts from its toughest standards.

"These institutions no longer had to make subprime loans to low-income people," Mark Thoma, an economist at the University of Oregon told me.

"That should have reduced the volume if the CRA was driving it." On the contrary, subprime lending increased.

CRA was a minor player in the mortgage orgy. Since the late '90s, half of subprime loans have been made by independent mortgage companies not subject to CRA rules, University of Michigan Law School professor Michael Barr told Congress in February. Another 30 percent came from affiliates of banks or thrifts with little CRA supervision. That left only one in five subprime loans fully governed by CRA.

Furthermore, companies not covered by CRA made subprime loans at more than twice the rate of lenders that were, according to Janet Yellin, president of the San Francisco Federal Reserve Bank. The idea that CRA brought the banks down is "just ridiculous," Thoma said.

The ugly truth is this: The redlining that led to the passage of CRA has been replaced by reverse-redlining. Lenders didn't have to be dragged into low-income neighborhoods. They rushed in. It was there that they could push their complicated mortgages onto the elderly, blacks and Hispanics, and then sell the loans to somebody else. At least 40 percent of the holders of subprime mortgages could have qualified for cheaper prime mortgages, according to one study.

Far from being spurned by financiers, low-income Americans have become their cash cow. Payday lenders are listed on the New York Stock Exchange. Operators go into poor neighborhoods pretending to be retailers. The product they "sell" — be it a used car or new sofa — is just a hook to saddle the trusting buyer with a loan that eventually costs them several times the ticketed price.

Yes, low-income people can be credit risks. That cannot be ignored. But this financial scandal is the work of fat cats, enabled by a permissive government. There's something highly indecent about blaming it on an innocuous law meant to remove some of the unfairness in the lives of the working poor.

To find out more about Froma Harrop, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at




3 Comments | Post Comment
Excuse me???? She's leaving out FACTS here and her articlie is completely misleading. During the Clinton administration, the CRA was adjusted to require financial institutions to provide even RISKIER loans to those who would normally not qualify. Also, she completely missed the point that the CRA was originally created to allow lending to those ethnic backgrounds whom banks considered poor risks. In other words, the CRA was to break down walls of racial discrimination. Which was a positive when it was created. But, the fact that it was altered during the Clinton administration to make lending available to those with poor credit and eliminate lending requirements that PROTECTED the financial industry. However, at this, the mortgage industry created "creative" financing for those who fit this mold.
So, ma' are WRONG...the CRA is the reason...but not the original CRA. You broke the rules of journalism. If you are going to present facts, make sure you present ALL facts and not only ones that make YOU look good. You completely MISLED readers. SHAME ON YOU!
Comment: #1
Posted by: Brenda
Fri Oct 3, 2008 4:55 AM
Excuse me??? Brenda's also leaving out or misstating facts. The CRA does not REQUIRE anything, specifically not risky loans, even after the much-maligned 1995 adjustments. The CRA was not responsible for the creation of subprime mortgages, they were the result of changes in the law in the 1980's. Their use expanded greatly in the late 1990's. While the 1995 changes in the CRA opened the door for subprime mortgages to be used for CRA compliance, the evidence is that the bulk of the risky loans were not made by lenders subject to the CRA. And there is further evidence that CRA loans were of higher quality than the average mortgage loan. While hard statistics are hard to come by in this area, blaming the CRA for the mortgage meltdown in the absence of such evidence is quite a stretch. At this point, the best evidence is that out-of-control lending by financial institutions not covered by the CRA (or much of any regulation), encouraged by fee-based sales (where the riskier loans generated the higher fees), where the risk could be passed on through securitization (often not involving Fannie or Freddie) is the real culprit.
If it turns out, after more evidence is available, that the government encouragement of risky lending is more of a culprit than it currently seems to be, then a couple of George W. Bush initiatives also need to be considered as contributory (possibly intervening) causes The American Dream Downpayment Act (a George W. Bush initiative for the government to pay the down-payment of minorities) and this White House Press Release ( wherein President George W. Bush announces his initiative for minority home ownership.
Given all of this, the blame being placed on the CRA by conservative columnists seems highly suspect.
Comment: #2
Posted by: Kim
Sun Oct 5, 2008 5:39 AM
Maybe you all have your facts right, I don't know. I did know many hard working people who didn't understand credit therefore didn't use it, therefore were considered poor credit risks, therefore couldn't get a mortgage. Whatever changed, for whatever reason, those hardworking people who never abused, just didn't use credit, all of a sudden were able to get a home financed. That was good news for them. Most now have their mortgages paid down or off. Others abused the credit card and were able to get a home financed even when they didn't have jobs. Some worthy people benefitted when the redlining stopped.
Comment: #3
Posted by: liz
Tue Oct 7, 2008 3:56 PM
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