Page 554 - untitled

Peter J. Wallison 525

151
December 3, 2008, in which he said in pertinent part:
Only 6 percent of all the higher-priced loans [those that were considered CRA loans
because they bore high interest rates associated with their riskier character] were
extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their
assessment areas, the local geographies that are the primary focus for CRA evaluation
purposes. Th is result undermines the assertion by critics of the potential for a
substantial role for the CRA in the subprime crisis. [emphasis supplied]
Th ere are two points in this statement that require elaboration. First, it
assumes that all CRA loans are high-priced loans. Th is is incorrect. Many banks, in
order to be sure of obtaining the necessary number of loans to attain a satisfactory
CRA rating, subsidized the loans by making them at lower interest rates than
their risk characteristics would warrant. Th is is true, in part, because CRA loans
are generally loans to low income individuals; as such, they are more likely than
loans to middle income borrowers to be subprime and Alt-A loans and thus sought
aft er by FHA, Fannie and Freddie and subprime lenders such as Countrywide; this
competition is another reason why their rates are likely to be lower than their risk
characteristics. Second, while bank lending under CRA in their assessment areas
has probably not had a major eff ect on the overall presence of subprime loans in the
U.S. fi nancial system, it is not the element about CRA that raises the concerns about
how CRA operated to increase the presence of NTMs in the housing bubble and in
the U.S. fi nancial system generally. Th ere is another route through which CRA’s role
in the fi nancial crisis likely to be considerably more signifi cant.
In 1994, the Riegle-Neal Interstate Banking and Branching Effi ciency Act for
the fi rst time allowed banks to merge across state lines under federal law (as distinct
from interstate compacts). Under these circumstances, the enforcement provisions
of the CRA, which required regulators to withhold approvals of applications for
banks that did not have satisfactory CRA ratings, became particularly relevant
for large banks that applied to federal bank regulators for merger approvals. In a
2007 speech, Fed Chairman Ben Bernanke stated that aft er the enactment of the
Riegle-Neal legislation, “As public scrutiny of bank merger and acquisition activity
escalated, advocacy groups increasingly used the public comment process to protest
bank applications on CRA grounds. In instances of highly contested applications,
the Federal Reserve Board and other agencies held public meetings to allow the
public and the applicants to comment on the lending records of the banks in
question. In response to these new pressures, banks began to devote more resources
152
to their CRA programs.” Th is modest description, although accurate as far as it
goes, does not fully describe the eff ect of the law and the application process on
bank lending practices.
In 2007, the umbrella organization for many low-income or community
“advocacy groups,” the National Community Reinvestment Coalition, published a
report entitled “CRA Commitments” which recounted the substantial success of its
members in using the leverage provided by the bank application process to obtain
trillions of dollars in CRA lending commitments from banks that had applied to

151 Randall Kroszner, Speech at the Confronting Concentrated Poverty Forum, December 3, 2008.
152 Ben S. Bernanke, “Th e Community Reinvestment Act: Its Evolution and New Challenges,” March 30,
2007, p2.