The Great Financial System Meltdown: Don't Blame CRA
There are many culprits for the virtual meltdown of our financial system. But the Community Reinvestment Act is not one of them. The denunciation of CRA has, to our surprise and dismay, been circulated in certain media, and even within the credit union movement. For example, in a recent posting to the community development banking electronic list, which reaches thousands of people in the field, Al Menard categorically declared that "Clearly the culprit and originating force in [the financial meltdown] was the CRA."
Notwithstanding the credentials Menard cites--Ph.D. in economics, Certified Credit Union Executive--his arguments do not stand up to scrutiny. It is important to refute his erroneous assertion because it threatens to lead people down a road that is bad for the American people--and bad for credit unions.
The Community Reinvestment Act of 1977 was an extraordinarily simple piece of legislation, simply directing banks to serve their entire communities, including low- and moderate-income segments. There are no criminal or even civil penalties for failing to live up to CRA. The "stick" of CRA is purely economic: the possible denial of bank applications to expand, add or close branches or merge. CRA does not direct a bank to make any particular loan or to abandon prudent lending standards. What some bankers object to, and what some credit union people fear (to an exaggerated degree, I believe) is the paperwork and compliance burden of CRA.
CRA is responsible for a tremendous amount of revitalization in the United States, particularly but not only in the areas of affordable housing. It is hard to imagine that billions of dollars of CRA-eligible or CRA-motivated financing would have occurred without the encouragement of CRA. It is worthwhile to point out that many low-income and community development credit unions have benefited directly from CRA investments, including grants and low-interest or no-interest deposits provided by banks. For many years--and some of my members would argue, even today--banks provided more financial support to new and struggling CDCUs than did the credit union movement.
Menard's colossally exaggerated attack on CRA as the "culprit and originating force" for the current $700 billion (or more) financial calamity is mistaken and harmful in a host of ways. It confounds a broad stream of policy directives from across the political spectrum; ignores the contribution of grotesquely complex securitization and financial engineering (yes, and greed); and doesn't stand up to any sort of rigorous validation.
But here's my greatest concern: these attacks on CRA promote unfounded fears of lending to low- and moderate-income people. If the credit union movement allows this view to take hold, we will find ourselves crossing a bridge to nowhere, with our historic philosophy and mission quickly receding in the rearview mirror.
The anti-CRA argument falls flat on a number of grounds.
Much of the huge mortgage-related losses originated not with banks but with mortgage entities that are not even covered by CRA.
Federal regulators have always--even to the frustration of some community activists--stressed that no bank was ever expected to make an unsafe and unsound loan, or even a below-market loan of any kind. Undoubtedly, many banks expanded their lending criteria and offered option ARMs, "liar loans" and other products at which everyone now recoils with horror. But banks didn't offer these because of CRA. They offered these loans to make money--a lot of money, in the short term. They were motivated by competitiveness or, worse, by greed--the kind of greed that, thankfully, very few credit unions indulged in.
Fannie Mae and Freddie Mac have become infamous because of their recent bailouts. But they were never subject to CRA. It is true that in recent years, they set very ambitious goals for promoting home ownership, pushing the needle up from the upper 60% range to 70% or so. As noted below, they did not set these goals in a vacuum.
The push for homeownership has enjoyed a virtually total national consensus, with supporters across the political spectrum, from right to left. President Bush--no friend of CRA--called for an "ownership society," of which homeownership was a cornerstone. Antipoverty advocates--I freely confess to being one--have argued for more than a decade that ownership of assets with the potential for appreciation--above all, homes--is a key to breaking the intergenerational chain of poverty.
If CRA were to blame, how does one account for institutions like JPMorgan Chase, which has consistently achieved the highest CRA ratings--yet has been financially strong enough to purchase Washington Mutual and Bear Stearns? (Full disclosure: for a decade, I have been on the Community Advisory Board of Chase and its predecessors.) Or for Bank of America, which also has achieved top CRA ratings and had enough cash left over to purchase Merrill Lynch?
Menard wrongly asserts that CRA applies to "community based credit unions." This statement is only true for state-chartered credit unions in Massachusetts, which do fall under CRA. But there is no evidence that this has caused them to suffer unduly from this regulation.
In his posting, Menard does cite other factors beside CRA that contributed to the crisis. But it is disingenuous to argue that these merely added a little "fuel to the fire"--unless one means fuel rods for nuclear reactors.
It is difficult, if not impossible, to precisely apportion blame for the current financial mess. Some pundits rage against "two million deadbeats" who knowingly took out loans they had no intention of paying back or were too stupid to understand loan terms or who somehow duped unsuspecting, good-hearted mortgage lenders to make them those "exotic" and untenable loans.
Yes, there were deadbeats and speculators among people now facing foreclosure. But hundreds of thousands more found themselves unable to make their payments because they lost their jobs, were stricken by illness and medical bills or suffered the financial and emotional pain of a family break up.
The sad truth is that if these people get to bankruptcy court, they--unlike the largest financial corporations in the world--will not face a judge who has the power to reduce their loan obligations to a manageable level. These fellow Americans are--in many cases, not all--victims. Punishing the victims is wrong, especially when few or no perpetrators of the current crisis will ever spend a night in a homeless shelter, not to mention a day in jail.
Over the last decade, the drumbeat for homeownership became loud and insistent. Countless mortgage lenders used aggressive, often deceptive marketing to push exotic loans on people who clearly could not afford them. Many people became desperate to own something of their own in a country where the gap between rich and poor has grown. Combine these factors with historically low-cost credit and relaxed lending standards, and, in retrospect, the current dilemma seems all but inevitable. Advocates such as the Center for Responsible Lending warned us several years ago that subprime lending was a runaway train. It has now rolled over us.
Looking ahead, it is vital that we focus on the root causes of the financial disaster. CRA is not one of them. We must not let misplaced opposition to CRA distract from our historic mission of serving people of modest means. Today, credit unions have an opportunity the likes of which we have not had for decades. Let us use this opportunity to move the American financial system in our direction.
Cliff Rosenthal is president /CEO of the National Federation of Community Development CUs. He can be reached at 212-809-1850, ext. 216 or email@example.com