Wednesday, October 8, 2008

Debunking the rumor that the Community Reinvestment Act caused the subprime lending failure

I've heard countless times during the election cycle that our financial woes are all rooted in the Community Reinvestment Act (CRA). http://www.fdic.gov/regulations/laws/rules/6500-2515.html

It is my position that this is not the case. The CRA while providing a requirement for regulated financial institutions to provide it's services (including credit) to the communities in which they are chartered to do business. NOWHERE in the CRA does it mandate making irresponsible loans.

First off, have you actually read the CRA?. It repeatedly mentions that the regulated institutions make the loans within the bounds of "consistent with the safe and sound operation" of said institution.

Nowhere does it suggest that loans be given to those who are unable to pay, or that loans should be made beyond the means of the applicant. The purpose was to give those poorer communities the same opportunity as those in more affluent regions. This stemmed from a practice called "redlining" that was popular in the 60s and 70s. (Redlining is the practice of denying or increasing the cost of services such as banking, insurance, access to jobs, access to health care, or even supermarkets to residents in certain often racially determined areas. )

In SEC. 802:
"It is the purpose of this title to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions."

In SEC 804:
"SEC. 804. (a) IN GENERAL.--In connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall-- (1) assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution; and "

Second, the CRA specifically targets "regulated financial institutions", which by definition in the act are "insured depository institutions"; ie: those commercial banks covered by FDIC.
This holds no bearing on the non-bank mortgage companies, which aren't regulated under the CRA. Yet these non-bank mortgages account for a significant percentage of all of the failed sub-prime loans.

Ultimately, the law isn't what made the institutions give out these loans, it was generated from profit motive. Greed is what drove the problem, pure and simple. Now, with the bailout, we've given Wall Street greed yet another bonus check with tax-payer sponsored Wall Street Welfare.

Nice try Mr. Conservative. Next time, try checking your facts.

1 comment:

Anthony D. Hall said...

The Conservative must like football because they come up with a lot of "Trick Plays". I call this one "MisDirection" some call it the "Naked Bootleg". You pretty much fake one way and go the other. They know that these Government Programs aren't the Issue. BUT! They say if to get people looking the other way. Trying to distract us from the real Problem. Corporate Greed. It is a well known fact Conservatives pretty much are in bed with Big Corporations. I will blame the government for "Mudding UP The Water" Greating the Grey Areas in which the Corporation love to work with in BUT, I don't believe it was the governments intention. The Corporations took advantage of opportunities. Thats what they always do.

Lets look at the Real Estate Industry. Most Realtors don't care if these people default on their mortgage. They will get their commision. The banks don't care because they are more than likly going to SELL the debt to Fannie Freddie. The INSURANCE COMPANIES are the ones that got BEAT. Because they were insuring bad Mortgages. Guys Like Jeff Greene made out like bandits. The government only turned its back but didn't commit the crime.

u2b

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