Scapegoating the Community Reinvestment Act

Even in the midst of the nation’s financial sector meltdown prompting a societal march toward a long and deep economic recession, far too many people who should know better have decided to blame the Community Reinvestment Act for the subprime foreclosure crisis and the implosion of commercial banks and mortgage brokers.

The nonprofit sector knows better—and had better get on the stick to advocate against efforts to weaken this absolutely vital component of national policy. Enacted in 1977 “to encourage depository institutions to meet the credit needs of lower-income communities" (emphasis added), CRA became a crucial tool for reversing the prevalent banking practice of racial and geographic “redlining.”

But the critics are using a list of complaints specifically about CRA that are untenable and plain wrong:

On October 8th, Clarence Page of the Chicago Tribune cited the most egregious or perhaps deluded of the attacks: “Neil Cavuto of Fox News opined last month that if banks hadn’t been forced to make loans to ‘minorities and risky folks,’ the Wall Street disaster would not have happened.”

  • CRA “forced” banks to make risky loans to low/moderate income homeowners (Laura Ingraham on the O’Reilly Factor)
  • CRA compelled making loans to “high risk clients” or “bad risks” (Jonathan Hoenig of Capitalistpig Asset Management LLC on Bill O’Reilly’s radio show, September 25)
  • CRA “forced banks to meet lending quotas” (Ramesh Ponnuru, “The Road to Financial Hell”, the National Review, October 20, 2008)
  • CRA planted the “seeds of today’s financial meltdown” (Stanley Kurtz, “O’s Dangerous Pals”, New York Post, September 29, 2008)
  • CRA “forced banks to make subprime loans” (Investors Business Daily, September 25, 2008)
  • CRA is a “scam” (Thomas J. DiLorenzo, writing for the libertarian Ludwig von Mises Institute, April 30, 2008)

These charges are all head-scratching business. CRA didn’t require lending, much less require bad bank behavior. There is nothing anywhere in the CRA that directed banks to ditch safe and sound lending practices; in fact, safe and sound is built into the law.

CRA established the principle that CRA-regulated depository institutions (not mortgage brokers) had a “continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered” and that regulators were to assess the regulated entities’ record of meeting the credit needs of their communities, “including low- and moderate-income neighborhoods, consistent with safe and sound operation of such an institution.”

In fact, only a small proportion of subprime loans originated by CRA-regulated banks (most subprime loans were issued by unregulated mortgage brokers).

It might be easy to dismiss these attacks as the ravings of right wing ideologues and TV pundits, but there’s more to the story. For some time, there has been a soft pushback against CRA. Because it was so easy for banks to get high CRA ratings, some banks celebrated sotto voce that CRA was no longer needed, that banks weren’t going to redline, and that they knew—as plenty of studies have demonstrated—that the performance of CRA-relevant home mortgages generally matched or outperformed the banks’ other lending portfolios in terms of stability, repayments, and (minimal) delinquencies.

It’s hard to imagine anyone buying into the new attack on the Community Reinvestment Act, the substance being so clearly erroneous, but in our society and in U.S. national politics, blaming the victim—in this case, the low- and moderate-income families who have been crunched by subprime and predatory loan products—is an art form that has worked in the past. No one should quickly dismiss these attacks as inconsequential.

The Community Reinvestment Act was actually, in a way, a small though insufficient step toward democratizing finance, which is what our society needs—in the U.S. and globally. As Robert Shiller wrote in his latest book: “Democratizing finance is crucial…(B)y spreading risk, it places economic life on a firmer foundation. Financial democracy is thus not only an end in itself, but a means to another, equally worthy, end; the propagation of greater economic stability and prosperity by financial means.” (Robert J. Shiller, The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It, Princeton University Press, 2008, p. 25).

If Shiller is right—and based on his current book and its predecessor (Irrational Exuberance), he tends to be spot on regarding the financial markets—the next step is not to weaken or ditch CRA, but to strengthen as a strategy to promote financial stability and prosperity. Expand it to the mortgage brokers who were the primary culprits behind the subprime crisis. Expand it to the insurance companies whose insurance redlining is sometimes perniciously working in the background undermining credit access for poor neighborhoods. Expand it to the investment bankers whose securitizing of mortgages has made some of the logical solutions to the subprime crisis so hard to pursue.

Why is this important to nonprofit readers of the Cohen Report? Two big reasons:

1. It is worth remembering that the enactment of the Community Reinvestment Act (and its data-gathering legislative companion, the Home Mortgage Disclosure Act) is one of the nonprofit sector’s biggest advocacy triumphs. Community-based organizations led the charge against bank redlining in neighborhoods across the nation, their aggregate triumphs leading to national legislation. One might suggest that the nonprofit sector remember, celebrate, and bolster its triumphs in this time of economic turmoil. If nonprofits don’t pay attention, they might suddenly find themselves in a last ditch action to save parts of CRA from anti-regulation conservatives and more progressive but still often somewhat libertarian or free market-oriented social entrepreneurs.

2. The financial meltdown and the bailout should not be seen as moments to sit back and simply conserve what’s currently on the books. Rather, nonprofits should take on the subprime mess and the overall financial sector meltdown with advocacy aimed at fixing the system, not simply assuaging its impacts in terms of helping homeowners deal with foreclosures. More advocacy is needed to democratize capital by giving people and communities a voice and stake in how banks and other financial institutions make decisions about the allocation of credit and capital—and expanding the democratization of capital beyond depository institutions.

This is why 501(c)(3) nonprofit organizations engage in public policy advocacy and lobby state and federal lawmakers. As this nation marches toward the deepest recession since the Great Depression, this is most assuredly not the time for nonprofit complacency. The CRA is a consummate example of nonprofit advocacy at its best. Rather than letting opponents chip away at this accomplishment, the nonprofit sector should be bolstering and expanding this vital tool for social progress.

For a very good retrospective on this legislation, see The 25th Anniversary of the Community Reinvestment Act: Access to Capital in an Evolving Financial Services System, prepared for the Ford Foundation by the Joint Center for Housing Studies at Harvard University, March 2002 (

  • Mary Rusnak

    Even some of the more eleoquent “DJs” in our area (Dallas-Fort Worth) blamed the entire meltodwn on the CRA. Nonprofits who deal with housing know better. With the CRA many responsible low income citizens would have been denied the wealth-building opportunity for homeownership and the security that goes with it. The meltdown is not due to encouraging low income homeownership when the potential homeowners are given both counseling, extensive education, monitoring of loans, and a safety-net of additional counseling if they are late on mortgage payments.

    The meltdown is due pure and simple to greed and lack of oversight on Wall Street.

    Thank you for the opportunity to vent.

  • rick cohen

    Thanks, Mary. You would think that people would know better. I was just involved in a semi-formal debate with a conservative philanthropist in late October at the Ohio Grantmakers Forum annual conference, and I was surprised to hear my debate opponent raise the now hoary charge of CRA having caused the subprime collapse–as an example of the dangers of regulation! Here’s the example, by the way, that shows the lie in the CRA-blamers’ argument: compare the delinquency/foreclosure problem in the homes developed and sold by nonprofit developers (just about a negligible problem) compared to the delinquency rates of homes financed by unregulated mortgage brokers and for-profit self-financing developers. There’s no question that the CRA-attentive CDCs, for example, have done a great job in linking low and moderate income homebuyers to conventional financing, supported by appropriate pre- and post-purchase counseling. Thanks for reading, Mary.