We are troubled by efforts to blame the current financial crisis on the Community Reinvestment Act (CRA). There is no evidence to support the assertion that CRA caused lenders to make the risky subprime loans that contributed to the current crisis in the financial markets. CRA does not require banks or thrifts to make loans that are unsafe or unprofitable – the law states that CRA lending must be done consistent with safe and sound banking practices. In fact, studies by the Department of Treasury and the Federal Reserve have shown that CRA has significantly improved the availability of fair and affordable credit and services without negatively affecting safety and soundness.
Despite assertions by CRA critics, studies indicate that CRA obligations helped deter insured depositories from engaging in lending practices that fueled foreclosures and the subsequent financial crisis, finding that CRA-covered banks and thrifts were significantly less likely than other lenders to make high-cost loans. The vast majority of high-cost subprime loans were originated by independent mortgage and finance companies – lenders that are not covered by CRA and are under no other federal obligation to lend in low- or moderate-income communities.
* according to an analysis of 2006 HMDA data, non-CRA lenders made a disproportionate number (84.3%) of high-cost loans in the 15 largest metropolitan areas.
* the Federal Reserve found that in 2005, 34.3% of home purchase loans issued by non-CRA mortgage companies were high-cost loans, while the number for CRA-covered institutions was just 5.1%.
* according to Inside B&C Lending and Inside Mortgage Finance, only a few of the top 25 subprime lenders in 2006 were federally regulated depository institutions with CRA obligations and the vast majority of the top 20 producers of risky interest-only and option ARM loans were not covered by CRA.
The timing of the foreclosure crisis also reinforces that CRA was not responsible for the mortgage market meltdown. CRA regulations were strengthened in 1995 and contributed to a significant increase in prime lending to low- and moderate-income borrowers in the ensuing years. The riskiest subprime lending was most prevalent, however, between 2003 and 2006, a period in which federal banking regulators reduced CRA obligations on thousands of banks and thrifts.
It is unfortunate that those opposed to CRA would make assertions about the law that have little basis in reality. The CRA is widely acknowledged with helping provide constructive credit to low- and moderate-income borrowers and communities rather than the destructive credit that accompanied the explosive growth in subprime lending by unregulated lenders. Rather than incorrectly blaming CRA for imprudent and reckless lending, we should commit to work in a bipartisan manner to improve regulatory oversight for all lenders to prevent a repeat of the practices that led to this crisis.
BARNEY FRANK MAXINE WATERS
Committee Chairman Committee Chairwoman
Member of Congress Member of Congress
MELVIN L. WATT
Member of Congress