The roots of today’s mortgage-based financial crisis can be traced back to the Community Reinvestment Act (CRA), which Jimmy Carter signed in 1977. Seeking to address complaints from anti-poverty activists and housing advocates about banks allegedly discriminating against minority borrowers and "redlining" inner-city neighborhoods, the CRA decreed that banks had "an affirmative obligation" to meet the credit needs of victims of discrimination in borrowing.
To add a government stick to the process, the CRA decreed that federal banking regulators would consider how well banks were doing in meeting the goal of more multiculturalism in loaning when considering requests by banks to open new branches or to merge.
A good "CRA rating" was earned by way of increasing loans in poor neighborhoods. Conversely, lenders with bad report cards could be fined.
The Fed, for instance, warned banks that failure to comply with government guidelines regarding the delivery of "equal credit" could subject them to "civil liability for actual or punitive damages in individual or class actions, with liability for punitive damages being as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions."
However well-intentioned in terms of delivering "economic justice," this push for more government-directed social engineering produced a widespread weakening of long-established industry standards for credit worthiness.
Led by Congressional Democrats, this policy of replacing private and decentralized decision-making with a system of centrally-delivered rewards and punishments was basically a one-party effort. Republicans, it seems, were more aware of the unintended consequences that flow from government interference in the market.
As Investor’s Business Daily recently stated it, succinctly and correctly: "Over the past 30 years, Democrats, along with a handful of Republicans, have demonized lenders as racist and passed regulation after regulation pressuring them to make more loans to unqualified borrowers in the name of diversity."
The march towards the eventual financial meltdown picked up speed during the Clinton administration via an increased lowering of loan standards in order to expand minority borrowing.
The result was widely praised. "It’s one of the hidden success stories of the Clinton era," wrote Ronald Brownstein in May 1999 in the Los Angeles Times. "In the great housing boom of the 1990s, black and Latino homeownership has surged to the highest level ever recorded. The number of African-Americans owning their own home is now increasing nearly three times as fast as the number of whites; the number of Latino homeowners is growing nearly five times as fast as that of whites."
Reported The New York in September 1999: "In a move that could help increase home ownership among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders."
In 2000, Howard Husock reported in City Journal that the "Clinton Treasury Department’s 1995 regulations made getting a satisfactory CRA rating much harder. There would be no more A’s for effort. Only results – specific loans, specific levels of service – would count."
The ratings for "specific levels of service" included judgments regarding how well banks were responding to complaints, including complaints from advocacy groups that were in the business of complaining.
"By intervening – even just threatening to intervene – in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers," reported Husock. "A radical group called ACORN Housing has a $760 million commitment from the Bank of New York."
In addition to setting the stage for giving money for mortgage payouts to ACORN and other lending amateurs, CRA authorized those organizations to collect fees from the banks for their "marketing" of loans.
"The Senate Banking Committee has estimated that, as a result of CRA, $9.5 billion so far has gone to pay for services and salaries of the nonprofit groups involved," reported Husock, writing in 2000.
There was big money, in short, in "nonprofit" activism – and upward mobility. A guy carrying a sign advocating "Change" in front of a bank had a good shot at being turned by the government into a salaried protester, credit analyst and dispenser of mortgage money.
"The changes came as radical ‘housing rights’ groups led by ACORN lobbied for such loans," reported Investor’s Business Daily, regarding the Clinton era. "ACORN at the time was represented by a young public-interest lawyer in Chicago by the name of Barack Obama."
Ralph R. Reiland is an associate professor of economics at Robert Morris University in Pittsburgh.
Ralph R. Reiland
E-mail: [email protected]