Mon
Sep 22 2008
02:07 pm

This is why liberals struggle in the "common sense" war:

The Community Reinvestment Act. This 1977 law compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval.

Robert Litan, an economist at the Brookings Institution, told the Washington Post this year that banks "had to show they were making a conscious effort to make loans to subprime borrowers." The much-maligned Phil Gramm fought to limit these CRA requirements in the 1990s, albeit to little effect and much political jeering.

My emphasis. Reality is completely blown out of the water using just two words. The hapless liberal is left flapping his gums for what seems like eons.

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R. Neal's picture

Good catch. And as the

Good catch. And as the article points out, the intent of CRA was to eliminate the practice of "redlining" and ensure equal credit opportunity. So in that respect, it was a good regulation that worked fine for a long time.

Besides the fact that it doesn't apply to mortgage companies who originated most of the sub-prime loans, the article hints at another good point, namely that CRA requires banks to make loans in the same areas where they take deposits. This means they can't take money from poor or minority parts of town and only loan it to borrowers in more affluent parts of town.

If banks were still actually involved in knowing their borrowers, knowing their means and ability to pay, and anticipating and explaining any challenges they might face, and then worked with them to make the loans happen and actually serviced the loans and helped borrowers keep their payments current, there wouldn't be so many foreclosures and there wouldn't be much of a market for "sub-prime" loans.

As it is, most banks are just originators who book the loans and fill out the paperwork which they can't wait to sell, along with the risk, to somebody else. They don't care who walks in the door to fill out an application, much less know them or their situation.

The one good thing that might come of all this is a resurgence of smaller community banks. If you look at the ratings of banks with local offices, local community banks are at the top of the list and the big regionals and mega banks are the ones having trouble. It's partly because they don't know their customers and don't care about them. Individual customers are just variables in their asset/liability management and interest spread calculations.

Rachel's picture

The CRA was passed in the

The CRA was passed in the late 70s. So it worked just fine for 40 years and then all of a sudden caused an international financial crisis??

Bah.

Sven's picture

It's partly because they

It's partly because they don't know their customers and don't care about them

That's borne out in the study cited over at Sadly No!

Our study suggests that without the CRA, the subprime crisis and related spike in foreclosures might have negatively impacted even more borrowers and neighborhoods.

Compared to other lenders in their assessment areas, CRA Banks were less likely to make a high cost loan, charged less for the high cost loans that were made, and were substantially more likely to eschew the secondary market and hold high cost and other loans in portfolio. Moreover, branch availability is a key element of CRA compliance, and foreclosure rates were lower in metropolitan areas with proportionately greater numbers of bank branches.

But I'm serious about the flapping gums part. The time has come for less wonk and more fire, brimstone and hyperbole:

The product of that huddle was a cockamamie scheme for the US treasury to absorb all the losses from a twenty-year binge in which Wall Street created and retailed the most complex set of swindles ever seen on this planet Earth.

gonzone's picture

Yeah, well

If this mess created by Wall Street's "Masters of the Universe" were the actual result of subprime mortgages, then that whole supposition might be valid. As it is, this ain't about subprimes, so the point fails.

"When the going gets weird, the weird turn pro."
Hunter S. Thompson

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