Minority and low-income homeowners have gotten a big share of the blame for the financial crisis. Conservative commentators argue that Democrats forced banks to lend to vulnerable and unworthy borrowers and the result was a wave of foreclosures.
The alleged legislative culprit at issue is the Community Reinvestment Act, held up as the hammer that Democrats used to beat banks into submission on behalf of their constituents.
On Wednesday, a top Federal Reserve official dispensed with that theory.
"I can state very definitively that, from the research we have done, that the Community Reinvestment Act is not one of the causes of the current crisis," said Sandra Braunstein, Director of the Division of Consumer and Community Affairs of the Federal Reserve System. Braunstein testified at a hearing of the Financial Institutions Subcommittee. Testimony from the hearing was compiled by committee staff and distributed to reporters.
Braunstein was responding to questioning by the subcommittee chairman, Rep. Luis Gutierrez (D-Ill.)
"We have run data on CRA lending and where loans are located, and we found that only six percent of all higher cost loans were made by CRA-covered institutions in neighborhoods targeted, which would be low to moderate income neighborhoods targeted by CRA," said Braunstein. "So I can tell you if that's where you're going that CRA was not the cause of this loan crisis."
"Republicans have long tried to take the easy way out by pointing the finger at the Community Reinvestment Act and other government-sponsored affordable lending programs; but these programs did not cause our foreclosure crisis," said Gutierrez. "The fact that only six percent of high-cost loans in our communities came from CRA institutions proves the true worth and value of the CRA to our neighborhoods."
Rep. Erik Paulsen (R-Minn.) asked Michael Middleton, the President and CEO of Community Bank of Tri-County, Maryland, what he thought of the consequences of the CRA.
"We really find the CRA as a tool, not an obstacle, and I mention also that all of our affordable housing loans are current, none of them are in default," said Middleton.