By Kenneth J. Cooper
Conservative Republicans and commentators have frequently blamed the housing crisis on the Community Reinvestment Act (CRA), which encourages banks to make loans in the low- and moderate-income areas where they operate. But a study to be released this week and a bipartisan commission, conclude that the federal law had little impact on the crisis.
The 1977 law, designed to prevent redlining in less prosperous neighborhoods, requires banking examiners to consider how many loans a bank has made in these urban neighborhoods and rural communities when financial institutions seek approval to open new branches, acquire other banks or merge.
Critics charged that the CRA forced banks to approve mortgages for poor, unqualified buyers who could not maintain payments and went into default or foreclosure, causing the housing market to collapse. That charge was also leveled often at the affordable-housing goals of Fannie Mae and Freddie Mac, federally sponsored enterprises that buy mortgages made by private lenders.
But the Democratic majority of the Financial Crisis Inquiry Commission established by Congress concluded in January that the 1977 law designed to prevent redlining was “not a significant factor in subprime lending or the crisis.” Ben Bernanke, chairman of the Federal Reserve, had made a similar statement two years ago, but the criticism continued.
The Democrats on the bipartisan commission also found that the affordable housing goals “contributed marginally” to purchase of risky mortgages by Fannie and Freddie.