By Philip Ashton
February 1, 2011
The Community Reinvestment Act (CRA) has been critical to the expansion of responsible credit for low- and moderate-income borrowers since its passage in 1977. Designed to address low levels of lending activity in low- and moderate-income neighborhoods, it has helped spur a growing range of successful affordable loan programs that reduce barriers to credit and increase responsible lending. Despite consistent evidence that the Act produces modest increases in access to capital and is an important incentive for bank investments to profitably tap new opportunities in community economic development, it has been a convenient scapegoat for journalists, academic economists, banking industry lobbyists, and their allies in Congress.
Opponents’ have shifted their arguments over time, but have consistently associated the Act with a number of doomsday scenarios that accompanied greater regulation of bank lending activity. These have alternated between dry, academic arguments – for instance, that the Act “promotes the concentration of assets in geographically non-diversified locations, encourages banks to make unprofitable and risky investment and product-line decisions, and penalizes banks that seek to reduce costs by consolidating services or closing or relocating branches” (Macey & Miller 1993: 295); and ferocious accounts by journalists and pundits manufacturing stories about “diabolically brilliant” conspiracies to compel banks to loan money (Schweizer 2009). In one recent revisionist history of the Act:
The solution to their problems, they believed, lay in forcing lending institutions to make risky loans in urban areas and set aside funds for selected socioeconomic or racial groups. Egged on by a media with an appetite for stories about racism, class warfare, and rising income disparities, the activists would increasingly demand a say in how mortgage loans were made. Using fear and intimidation and the megaphone of a sympathetic press, they would begin to chip away at lending standards, weaken underwriting rules, and push banks away from their traditionally conservative practices (Schweizer 2009: 29).
Republican control of Congress after 1994 provided a platform for these critiques. As prominent opponents (including Republican Senators Alphonse D’Amato, Phil Gramm, Connie Mack, and Richard Shelby) tried to roll back key provisions of the Act as part of broader financial reform, they associated the Act with systemic instability – in the words of Richard Shelby (R-Al), “the Community Reinvestment Act is nothing more than a Government-mandated credit allocation, much like the mandated credit allocation in East Asia that has caused the currency crisis, among other things.” In the wake of the growing mortgage crisis after 2006, this “cry wolf” strategy gained momentum, as conservative commentators have uniformly pushed the argument that government “mandates” forced banks to load their portfolios with risky loans, exposing the banking sector to heightened losses.
As policymakers and Congress consider not only new regulations for CRA, but also an entirely new architecture for housing finance, this is an important opportunity to review the historical record on CRA’s accomplishments and identify the thin grounds for these criticisms of the Act.