Don't Blame Subprime Mortgage Crisis or Financial Meltdown on CRA
Whether it’s a misunderstanding of the facts, or an intentional effort to deceive is unclear, but a number of recent news reports have blamed the current financial crisis on the Community Reinvestment Act – claiming that the Community Reinvestment Act (known as CRA) forced banks to give subprime loans to minorities in poor neighborhoods who were credit risks. The reports allege that those irresponsible poor folks couldn't keep up their payments and now the economy is going down the tubes.
Given that the causes of the subprime mortgage crisis and the financial meltdown are complex, and don’t lend themselves to an easy explanation, blaming CRA can sound somewhat plausible - as long as you don't know much about the CRA.
Here are a few things you should know about the Community Reinvestment Act – which also serve to obliterate the “Blame it on CRA” reports:
- CRA is a well regarded law that has been on the books since 1977. The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations.
- CRA doesn't require loans to be made, to minorities or anyone else. It requires that the same rules apply to people seeking mortgages in poor neighborhoods as those buying in other neighborhoods. "Nor does the law require institutions to make high-risk loans that jeopardize their safety," according to the Federal Reserve's CRA Web site, "To the contrary, the law makes it clear that an institution's CRA activities should be undertaken in a safe and sound manner."
- CRA only applies to federally-regulated banks and thrifts whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC). Mortgage broker and mortgage companies like Countrywide Financial and fly-by-night cheapmortgage.com-type operations that provided the overwhelming majority of subprime mortgages were not federally-regulated – and were not covered by CRA. Half of the subprime mortgages were made by companies that weren't covered by the CRA, and another 30 percent were written by organizations only loosely affiliated with CRA banks.
- Federally-regulated banks, which are covered by CRA, have operated under more supervision, and therefore the failure rate for mortgages made by those institutions has been significantly lower, and those mortgages were less likely to be bundled into the mortgage-backed securities that have caused most of the headaches on Wall Street.
- CRA only applies to designated low-income neighborhoods. CRA has nothing to do with a mortgage on a $500,000 home, let alone an $800,000 home. The recent borrowing binge was a nationwide phenomenon that had nothing to do with CRA.
Yes, low-income, urban neighborhoods have been especially hard hit by foreclosures, but that’s because minorities and lower-income families were specifically targeted by irresponsible mortgage brokers and mortgage companies, and they were often talked into higher-cost subprime mortgages and exotic mortgage products, even when they could have qualified for more appropriately priced fixed rate mortgages. Plus, many lower-income families are forced to live closer to the edge and are always the first hurt when the economy turns.
Blaming the subprime mortgage mess and the financial meltdown on CRA and on lower-income minority families is a classic case of “blaming the victim”. America deserves better than that.
Additional information is provided on this web page in the interest of clearing up the misconceptions regarding CRA’s involvement in the subprime mortgage crisis, based on the loan performance NeighborWorks America has experienced in regard to lower-income and minority families receiving housing counseling and other assistance from our affiliated local NeighborWorks organizations and similar experience being reported by other nonprofit organizations across the country.
