Minnesota Independent - Against All Reason, Bachmann and Others Blame 1977 Fair-Lending Law for Adding to Economic Crisis

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Minnesota Independent - Against All Reason, Bachmann and Others Blame 1977 Fair-Lending Law for Adding to Economic Crisis

Everyone with a soapbox has spent the better part of this week pointing fingers at who is to blame for the emerging economic crisis stemming from the default of millions of subprime mortgages. One direction that conservatives, Republicans and bankers are pointing their fingers is at the Community Reinvestment Act of 1977 (CRA) — a law created to counter the discriminatory practice mortgage banks used for decades to single out minority neighborhoods for subprime mortgages or otherwise deny credit-worthy individuals access to capital simply because of the color of their skin and their neighbors.

Rep. Michele Bachmann slammed CRA in an appearance on Larry King Live on Monday night. "Look at the housing crisis. Government has to take its share of the blame," she said. "After all, the government was goading these mortgage lenders, saying, ‘You're redlining. You're being discriminatory. If you don't give loans out to marginally credit-worthy people we're going to come after you.' In fact, Chairman Barney Frank has made comments like that as well."

She continued, "The Democrat [sic] controlled Congress wants to have these mortgage lenders make loans to people with marginal credit. Well, guess what? If you aren't making lending… it is not a shock when you have loans that aren't paid back."

Bachmann sits on the House Financial Services Committee with fellow Minnesota Rep. Keith Ellison. And Ellison is not amused by that type of rhetoric.

"This is the height of chutzpah," said Rep. Keith Ellison in a scathing statement on Tuesday. "To suggest that the greatest financial crisis we face since the Great Depression was caused by legislation that was created to help PREVENT low-income individuals from assuming high-cost, subprime loans that have caused the crisis today is absurd."

"To suggest that struggling families trying to keep their homes brought down the ‘Titans of Commerce,' ‘The Masters of the Universe' on Wall Street, is ludicrous. To suggest someone who is raising three children while holding down two minimum-wage jobs on a high school education was able to stall one of the greatest economic engines on earth needs their head examined," Ellison said.

And empirical data back Ellison's assertion. A number of studies show that CRA has in fact decreased predatory lending in minority neighborhoods and that banks subject to CRA regulations were less likely to offer subprime loans.

The New York law firm of Traiger and Hinckley analyzed subprime loan data in the 15 largest metropolitan areas (PDF). Only 25 percent of lenders in low- to moderate-income neighborhoods were under the purview of CRA, because many of the newer lenders fell outside of the scope of regulation. The CRA banks, however, were significantly less likely to offer subprime loans, offered lower rates and had fewer foreclosures on their books.

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

And while critics contend that CRA costs banks, other contend that once lenders move into underserved neighborhoods, profit can be made. Ellen Seidman of the New America Foundation's Financial Services and Education Project told Comgress, "Once these initiatives were started, many have proven to be sustainable in purely financial terms."

Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco, told Congress in April:

"There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term."

Interestingly, in 2005, just as the the explosion in subprime loans hit underserved neighborhoods, the Bush administration under pressure from banks changed the rules so that only banks with $1 billion in assets would be subject to CRA. The law was essentially gutted.

Robert Gordon of the American Prospect has traced the roots of the "blame CRA" meme back to Ron Paul supporters and crackpot conservative message boards, then to the conservative Washington Times and finally to Bachmann and other prominent conservatives. Talking Points Memo put together this video of conservatives blaming minorities for the housing collapse.

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