A law good enough to be hated

By Michelle Chen Apr 30, 2009

Perhaps it’s just too easy to blame the financial crisis on Wall Street’s avarice and Washington’s deregulatory frenzy. Hence the right-wing punditry’s talent for ascribing just about any calamity to poor Black people. Since the early days of the meltdown, conservatives have grasped for ways to link the mortgage crisis to overgenerousness toward the poor and people of color. So they’ve seized on the Community Reinvestment Act as a root cause of Wall Street’s demise, grumbling that banks were forced to lavish poor people with loans that they could not possibly pay back—and liberal politicians made them do it. A number of reasonable observers have pointed out that in reality, the 30 year-old law was designed to curb unfair lending practices, especially the redlining of low-income communities. Did it increase bank activity in neighborhoods historically starved of capital and marginalized from the mainstream financial structure? Well, yeah. The point was to encourage lending in underbanked communities as well as to impose safeguards against exploitation. The lenders truly at the heart of the subprime bubble were a different animal, many of them non-bank mortgage mills not covered by the CRA. So you might say the problem with the CRA is that it didn’t go far enough. David Berenbaum, executive vice president of the National Community Reinvestment Coalition, testified before Congress last month:

“It is likely that a foreclosure crisis would not have occurred had CRA been extended to cover broad segments (e.g., banks, credit unions, mortgage companies, investment banks, insurance companies, securities firms, and other financial institutions) of the financial services industry.”

A study of seven metropolitan areas (Chicago; New York City; Los Angeles; Rochester, NY; Boston; Charlotte, and Cleveland) by the California Reinvestment Coalition, Neighborhood Economic Development Advocacy Project and other organizations, has revealed that the CRA has been instrumental in promoting fair banking in low-income communities:

“In low- and moderate-income communities, depositories with CRA obligations originated a far smaller share of higher-cost loans than lenders not subject to CRA. “Lenders not covered by CRA made the vast majority of higher-cost loans in the seven metropolitan areas examined. In all of the metropolitan areas examined, lenders covered by CRA had a much larger presence in the overall lending market than in the higher-cost lending market.

On the other hand, the study noted that high-cost lending, by both CRA and non-CRA-regulated institutions, “is disproportionately concentrated in communities of color” (though CRA lenders were less likely to make high-cost loans in these communities). The authors of the report stressed the need for a race-conscious regulatory framework. The CRA could go further by focusing not just on low-income communities, but Black and Latino borrowers generally; they’re more vulnerable than whites to abusive loans even at higher income levels. There are other avenues for challenging abusive lending practices, such as the civil rights litigation led by the NAACP against HSBC and Wells Fargo. But the CRA’s mission isn’t just to punish banks for screwing the poor—it commits them to certain social responsibilities. At a recent panel discussion at the Hudson Institute, Deborah Goldberg of the National Fair Housing Alliance said:

"What [the CRA] has done is to afford the opportunity for community groups and banking institutions around the country to come together to learn each other’s business, to learn each other’s community, and to craft loan products and marketing efforts to reach into previously underserved or unserved communities and make credit available."

With so many Americans thoroughly disgusted by the financial sector, it’s hard to imagine a world where banks actually cooperate with struggling neighborhoods. But the history of the CRA suggests that tightening the law’s standards and expanding it to include a racial justice component could help more communities build equity on fair terms. Could the Community Reinvestment Act be a rare example of legislation that brings some sanity and fairness to banking? No wonder so many people hate it. Image via flickr