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The Financial Crisis and the CRA
...Sizable pools of capital came to be allocated in an entirely new way. Bank examiners began using federal home-loan data—broken down by neighborhood, income, and race—to rate banks on their CRA performance, standing traditional lending on its head. In sharp contrast to the old regulatory emphasis on safety and soundness, regulators now judged banks not on how their loans performed, but on how many loans they made and to whom. As one former vice president of Chicago’s Harris Bank once told me: “You just have to make sure you don’t turn anyone down. If anyone applies for a loan, it’s better for you just to give them the money. A high denial rate is what gets you in trouble.” It’s no surprise, then, that as early as 1999, the Federal Reserve Board found that only 29 percent of loans in bank lending programs established especially for CRA compliance purposes could be classified as profitable....

...As economist Russell Roberts of George Mason University points out, Bank of America reported that nonperforming CRA-eligible loans were a significant drag on its third-quarter 2008 income. Its earnings report states: “We continue to see deterioration in our community reinvestment act portfolio which totals some 7 percent of the residential book. . . . The annualized loss rate from the CRA book was 1.26 percent and represented 29 percent of the residential mortgage net losses.” This is a far cry from the advocates’ standard line that CRA loans, while less lucrative than standard mortgages, are still profitable.

But the CRA advocates, including the New York Times, continue to claim that CRA-qualified loans made by regulated financial institutions performed well and shouldn’t be implicated in our current troubles. They point to the results of an evaluation of CRA loans by North Carolina’s Center for Community Capital, which found that such loans performed more poorly than conventional mortgages but better than subprime loans overall. What they don’t mention is that the study evaluated only 9,000 mortgages, a drop in the bucket compared to the $4.5 trillion in CRA-eligible loans that the pro-CRA National Community Reinvestment Coalition estimates have been made since passage of the Act. There has been no systematic study, by either the Government Accountability Office or the Federal Reserve, of the performance of loans cited by banks in their CRA filings. Many such loans weren’t even underwritten by the banks themselves, which often purchased CRA-eligible loans (advertised in such publications as American Banker) and then resold them. Again, the emphasis was on showing regulators that loans were being made—not how they were performing. How could such a system not lead to problem loans and high delinquency and foreclosure rates? Eight years ago, when the national average delinquency rate was 1.9 percent, Marks told me that the rate for his organizations’ loans was 8.2 percent....