It's Time to Strengthen the Community Reinvestment Act

The 30th Congressional District of Texas is an extremely diverse district that includes low -- and moderate-income neighborhoods in Dallas County, as well as wealthy areas. Most neighborhoods in District 30 have historically been subject to redlining by banks -- the practice of denying loans and services to people based on where they happen to live. Congress has passed a number of laws designed to combat redlining and eliminate housing discrimination. One of these laws -- and the one that has been in the news recently -- is the Community Reinvestment Act, or CRA, which President Carter signed into law in 1977.

CRA encourages banks to invest in the communities in which they operate. It established a system to monitor and rate whether banks are lending to all of their qualified customers -- for home mortgages, small business creation, and economic development. CRA uses the mechanism of public accountability to achieve its goals -- rather than impose quotas or set specific credit targets, it rates banks on their practices, making them more transparent. CRA also enables the federal institutions that examine banks to delay or deny a bank's request to merge with another lender, open a branch, or expand any of its services, depending on its CRA rating. The larger the bank, the more rigorous the CRA exam.

CRA currently applies only to banks and thrifts (thrifts are depository institutions, like savings banks and savings and loan associations). It does not apply to other financial institutions that lend money, like bank affiliates and independent mortgage companies.

In recent months, people have blamed CRA -- and its low- and middle-income recipients of loans -- for the meltdown in the housing market, and thus, the financial crisis. Let's examine some of the real facts:

· At least 75% of subprime loans originated at independent mortgage companies and bank affiliates. However, CRA applies only to banks and thrifts.

· Most subprime lending occurred between 2003 and 2007--and remember, CRA became law in 1977. It was the recent lack of regulatory oversight that led to problems.

The truth about CRA is that it encourages prime lending. It offers incentives for safe and sound loans and foreclosure prevention efforts, including for counseling loan recipients, modifying loans, and investing in funds that finance loan modification. CRA also penalizes banks and thrifts through reduced CRA ratings if they engage in predatory or discriminatory lending, or lending and services that have a negative impact on the community.

And CRA has worked. Not only has it encouraged the investment of $4.5 trillion in minority, low- and middle-income neighborhoods since 1977, it has benefited the banks and thrifts that have invested that money -- one thing we have learned after more than two decades of CRA is that responsible lending in these communities is profitable for the banks and thrifts.

CRA has thus been an extremely successful law. And I am working with Representative Luis Gutierrez to make it even better -- in the 111th Congress, we will reintroduce the CRA Modernization Act. Currently, CRA encourages lending to low- and moderate-income neighborhoods -- which indirectly increases lending to minorities, who have been disproportionately harmed by redlining. The CRA Modernization Act will incorporate lending to minority borrowers into its criteria for CRA exams.

It will also apply CRA to non-bank financial institutions, like the unregulated bank affiliates and independent mortgage companies that have been engaging in the majority of the subprime lending in recent years. As a result of these improvements to CRA, we will see fewer home foreclosures, because more lenders will have incentives to prevent them. Equally important, we will see smart and safe investment in our communities -- exactly what our struggling economy needs right now.

Congresswoman Eddie Bernice Johnson represents the 30th Congressional District of Texas. She chairs the House Transportation and Infrastructure Subcommittee on Water Resources and Environment and is a senior member of the House Committee on Science and Technology.

Comments

[1will]

Haven't we already required the banks to loan enough money to people that can't pay it back?

[SilviaMaria]

Thank you for providing insight about the CRA. I am just tired of hearing some people blaming the financial meltdown on minorities and poor people because banks were "forced" to lend money to buy a house.

[prainva]

Thank you for providing insight about the much-maligned CRA. If it were not for the CRA, I would not have been able to purchase my house. The CRA did not mean that I did not have to fully qualify, it just allowed me to have a lower (or no) down payment, finance my points, and avoid paying PMI. I still had to prove my income and justify every late payment I had ever made on my Sears bill. I opted for an ARM, but fixed-rates were available, too. My ARM terms were 1 point a year, no more than 5 over the life of the loan - hardly the Draconian balloon ARMs we've been reading about. This program strengthens home ownership by providing mortgages to those who deserve them. It does not just throw money around willy-nilly.