---

The Phony Time-Gap Alibi For The Community Reinvestment Act
...In the first place, it should be noted that the attempt to exonerate the CRA seems to turn on the idea that the act didn’t encourage much lending at all. This, of course, runs completely contrary to the advocates of the CRA during the housing boom. Back then, they were bragging about how effective the CRA had been in spurring lending. “Over the last decade, Treasury studies have shown that CRA helped to spur $1 trillion in home mortgage, small business, and community development lending to low- and moderate-income communities,” the pro-CRA Brookings Institute wrote in 2004.

For the first decade or so of its existence, the CRA probably didn’t have much of an effect. In fact, fair housing advocates and others were severely critical of the way it was enforced. The process was standard-based and described as “hands-off.”

In 1989, President George H.W. Bush signed into law the Financial Institutions Reform Recovery and Enforcement Act that included provisions to increase public oversight of the way the CRA was enforced. Regulators were required to issue public, written performance evaluations of banks, including a system that rated bank compliance as Outstanding, Satisfactory, Needs To Improve or Substantial Non-Compliance. This public scrutiny began to push banks to make more loans to low-income borrowers, a process that often involved putting in place relaxed lending standards.

Shortly afterward, Fannie Mae and Freddie Mac addressed bank fears that the low-income lending with relaxed standards would unduly increase risk by beginning to securitize “affordable” mortgages. This was the beginning of subprime lending. It was the “pull” factor that complimented the “push” factor of the CRA.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which opened the door for interstate banking and encouraged a new wave of banking M&A, made the ratings under the CRA a test for determining whether acquisitions would be allowed. That same year, the Fed refused to allow a Hartford, Connecticut bank to acquire a New Hampshire bank on fair housing and CRA grounds.

This was the first time the Fed had ever taken this kind of action, and it had profound effects through the banking sector. It sent a strong signal to the banks that the Fed would closely scrutinize lending practice, limiting the ability of banks to grow or make acquisitions if they were found to have insufficient low income or minority lending. Banks immediately responded by lowering down payment requirements and using more flexible income criteria. ...

...In 1995, regulators began to enforce the CRA in a very different way than they had in the past. Instead of focusing on the process of bank lending, the new regulations were focused on objective performance evaluations. At the same time, regulators began disclosing more information about particular banks. As one commenter put it at the time, “We have learned from 30 years of CRA policy that what is measured gets done.” In short, publicly measuring low-income loans encouraged more of it. And the way regulators advised making low income loans involved features we now regard as toxic.

In November 2000, then-HUD Secretary Andrew Cuomo announced that Fannie Mae and Freddie Mac were committed to purchasing $2 trillion of “affordable housing” mortgages. This greatly increased the willingness of banks to make the kind of mortgages being promoted by the regulators. As the push factor of the CRA was increasing, the pull factor of Fannie-driven securitization was also increasing....

...In early 2005, largely at the behest of the banking sector, the Office of Thrift Supervision implemented new rules that were widely perceived as weakening the CRA. Supervision of banks with under $1 billion in assets was loosened, and larger banks were allowed to voluntarily reduce the amount of regulator scrutiny of their “investment” and “service”–two long-standing categories of assessment under the CRA.

This had two unintended consequences that would later prove to be very costly. In the first place, it increased CRA scrutiny of larger banks, who were now the main focus of regulators. This put even more pressure on the banks to make CRA loans. Secondly, by allowing banks to de-emphasize “investment” and “service,” the new regulations created an even greater incentive for banks to meet CRA obligations by making home loans. ...