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How Little Law From '70s Brought The Financial System To Its Knees
...Although the Community Reinvestment Act had no major immediate impact, over the years its underlying assumptions and provisions provided the basis for ever more insistent pressure on lenders from a variety of government officials and agencies to lend to those whom politicians and bureaucrats wanted them to lend to, rather than to those whom lenders would have chosen to lend to on the basis of the lenders' own experience and expertise.

These pressures began to build in the 1990s and increased exponentially thereafter. Studies in the early 1990s, showing different mortgage-loan approval rates for blacks and whites, set off media sensations and denunciations, leading to both congressional and White House pressures on agencies regulating banks to impose new lending rules, and to monitor statistics on the loan approval rates by race, by community and by income, with penalties on banks and other lenders for failing to meet politically-imposed norms or quotas.

These stepped-up pressures began during the George H.W. Bush administration and escalated during the Clinton administration, when Attorney General Janet Reno threatened legal action against lenders whose racial statistics raised her suspicions....

...In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had.

For banks, simply proving that they were looking for qualified buyers wasn't enough. Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers. The new regulations also required the use of "innovative or flexible" lending practices to address credit needs of LMI borrowers and neighborhoods.

In plain English, the regulators imposed quotas — and, if lenders had to resort to "innovative or flexible" standards and methods to meet those quotas, so be it.

Because banks are federally regulated enterprises, they need government permission to do many things that other businesses do as they see fit. That permission can be delayed or denied when objections are made that banks or other lenders are not living up to their obligations under the Community Reinvestment Act.

For example, when legislation was pending in 1999 to permit banks to diversify into selling investment securities, the White House urged "that banks given unsatisfactory ratings under the 1977 Community Reinvestment Act be prohibited from enjoying the new diversification privileges" of this legislation.

Accordingly, when Congress passed legislation removing existing prohibitions against banks affiliating with securities or insurance firms, this new scope of banking operations was in fact reserved for those banks with a "rating of 'satisfactory record of meeting community credit needs,' or better, at the most recent examination of each such institution" — that is, banks that met government-imposed quotas.

These were not the only government pressures on banks to fulfill lending quotas. In 1993, the Department of Housing and Urban Development "began bringing legal actions against mortgage bankers that declined a higher percentage of minority applicants than white applicants." Lenders then began lowering their down payment and income requirements.

HUD also brought pressures to bear on Fannie Mae and Freddie Mac to increase their purchases of mortgages made to low-income and moderate-income home buyers. In 1996 HUD set a target that 42% of the mortgages bought by Fannie Mae and Freddie Mac were to be financed for people with incomes below the median income in their areas.

Various community activists across the country have been able to pressure banks into making concessions in money or in kind, in order to get those activists to withdraw their objections to pending bank mergers or to banks opening new branches in another state, for example. (In 1999) the Wall Street Journal reported:

Increasingly, community activists are taking banks to task — and winning large financial concessions — under the federal Community Reinvestment Act. . . . This year alone, banks are expected to pony up $1 billion in low-cost loans and other aid for such causes as housing for the poor and the development of inner-city businesses....