Reply To: The Financial Crisis Was a Failure of Regulation – Just Not The Way You Describe

Home Forums Member Discussion The Financial Crisis Was a Failure of Regulation – Just Not The Way You Describe Reply To: The Financial Crisis Was a Failure of Regulation – Just Not The Way You Describe


Tom Gross

No. The Community Reinvestment Act had nothing to do with the mortgage meltdown/economic crisis. It is intriguing to find that discredited meme promoted by the conservative think tank The Heritage Foundation still finding its way around the internet.

The CRA regulations in question did not apply to independent mortgage companies that made the overwhelming bulk of the bad housing loans. The CRA applied only to banks covered by the FDIC (Federal Deposit Insurance Corporation) regulations. And even then, it did not force any banks to make riskier loans. In fact, CRA housing loans were around 10x less likely to end in foreclosure. Most – over 75% – of all bad loans were made by institutions that were NOT covered by FDIC, therefore those that were NOT under CRA guidelines.

Some links for further research:
“First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken together… we believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis,” he said in a speech today in Washington.
“It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did. And that is not political correctness. It is correctness”.
“CRA does not either encourage or condone bad lending. Bank regulators were decrying bad subprime lending before the turn of the millennium (see Interagency Guidance on Subprime Lending), and warning the CRA-covered institutions we regulated that badly underwritten subprime products that ignored consumer protections were not acceptable. Lenders not subject to CRA did not receive similar warnings.And we also explained to those we regulated how to serve lower income communities and borrowers in a manner that was good for the borrower, good for the bank, and earned CRA credit.”