Political Lies and Truths About CRA and its Role in the Subprime Mortgage Crisis
Political Lie: President Clinton created the subprime mess by enacting the Community Reinvestment Act (CRA).
Truth: CRA was enacted in 1977, under the Jimmy Carter administration, not under the Clinton administration. The Act was largely intended to identify and discourage "redlining," a discriminatory practice where lenders took money from depositors in certain communities but would offer no credit to the entire population rather than look at depositors individually.
Clinton was responsible for substantial changes in CRA law to encourage business growth. The language was considered controversial at the time so it was written into the new guidelines that CRA be revisited seven years later for performance evaluation. Bush II did revisit the Act and significantly altered it in a 2005 amendment.
During Clinton’s administration, in part because of incentives for business growth and access to capital, the economy not only thrived but more millionaires were created in the four years Clinton was in office than in any other time throughout history. The subprime mortgage problem only began to occur in measurable terms after Bush amended CRA in 2005 dramatically weakening the law.
Political Lie: CRA forces (or encourages) lenders to offer risky loans to people in order to fill quotas.
Truth: CRA has no such provisions, quotas, or across-the-board requirements.
Political Lie: CRA law is what caused the mortgage crisis.
Truth: For every economist who blames CRA for “lenders gone wild” there are just as many who refute this. I am not an economist, nor a politician, I am a business women but it is hard to see how a 30-year-old law that has been substantially watered-down (revised in May 1995 by Bill Clinton to strengthen the CRA and amended in August 2005 by George Bush to weaken CRA law) is now to blame for the mortgage crisis.
There was no mortgage crisis prior to 1985 when CRA regulations were substantially weakened by Bush, but in the years following we saw a sharp increase and beginnings of a wide spread problem with subprime mortgages. It is also extremely important to note that the bulk of unfair and high-risk loans were offered by lenders who were not even subject to CRA regulations.
It is estimated that approximately 75% of all subprime loans were made by institutions that are not fully governed by CRA. The crisis at hand is from unregulated loans; not from regulated institutions.
The Washoe County Republican Party reports:
"Due to massive financial losses, on September 7, 2008 the Federal Housing Finance Agency (FHFA) put Fannie Mae and Freddie Mac under the conservatorship of the FHFA."
Even if you consider Freddie Mac, and Fannie Mae, it is important to realize subprime lending was not the fall of Freddie and Fannie, but an attempt to boost their market share with Alt-A mortgages that were bought or guaranteed in recent years – not because of extending credit. In simplest terms, both Freddie and Fannie got caught up in real estate speculation in areas like Los Angeles and Las Vegas - not because CRA “required them” to rely on predatory lending to low-income folks in the inner cities.
Sources:
The Federal Reserve Board. "The Community Reinvestment Act." Access Date: September 27, 2008.
Saman. Foreclosure Data Online. "The Subprime Mortgage Crisis: How Did It All Start?" November 19, 2007.
The Huffington Post. "Memo to Republicans: CRA Has Nothing To Do With the Current Problems." September 18, 2008.
