DON'T BLAME THE COMMUNITY INVESTMENT ACT OF 1977 FOR OUR TROUBLES ENTIRELY

During the Carter administration, Congress passed the Community Reinvestment Act of 1977. It was intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. The CRA requires that each depository institution's record in helping meet the credit needs of its entire community be evaluated periodically. That record is taken into account in considering an institution's application for deposit facilities.
Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions. Rather, the law indicates that the evaluation process should accommodate an institution's individual circumstances. Nor does the law require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution's CRA activities should be undertaken in a safe and sound manner.

This act was given more teeth under the Clinton administration in order to insure that financial institutions were not targeting affluent communities alone in their credit funding considerations (redlining). During this time, institutions like Fannie Mae and Freddie Mac were allowed to hold only 2.5% in capital to back their investments, as opposed to 10% for banks.

The Wall Street Journal has criticized the CRA "requirements" for minority credit offerings, saying in part that "the law compels banks to make loans to poorer borrowers who often could not repay them. This was also stated by the executive board member of Countrywide (one the nations largest loan providers), who said that lenders have had to "stretch the rules a bit...."

Under George Bush, the CRA was brought under the supervision of the Department of the Treasury, and in 2005, the CRA review was not required for institutions with loans portfolios less than $1 billion, as opposed to the previous $250 million previously. This significantly reduced the amount of oversight upon the financial institutions operating in the U.S., especially the smaller institutions.

Now that you know the history of this act, let me give you some sobering facts...

• Over half of the loans currently in default, were made by smaller, independent financial institutions, who had no obligations to make loans to the poorer communities, and basically had little or no CRA oversight whatsoever.


• For every one sub-prime loan made by a CRA institution, two were made by a non-CRA overseen institution.

Obviously, this act must be reviewed carefully in examining our current mortgage crisis, however, if you are looking for a scapegoat, you need to look further. While there is a current fever pitch to blame less affluent borrowers, and the CRA which encouraged it, or the President who reached out to these communities with the act, we must remember that this act has survived over thirty years, through congressional, and Presidential terms controlled by both parties.

Factually, it did play a part in this current crisis. However small its effect, whether we should point blame on Carter for signing it, Clinton for giving it teeth, or Bush for reducing oversight over it, is a call that needed be made. This financial crisis is to large and extensive for any one piece of legislation to be the sole cause.

However, I personally place a ton of blame on the deregulation of the banks, investment houses and financial institutions. And having said that, you have to look at this guy....

Yes, it's Phil Gramm, of "a nation of whiners" fame. The man who introduced the Gramm-Leach-Bliley Act to the Republican-dominated US Senate, and enabled its passage in the Senate, on the 6th of May, 1999. I guess you already know what his buddy voted, he publically boasts as being "The De-regulator." Senate majority leader Harry Reid expressed it this way....."Phil Gramm, financial advisor to John McCain....The same Phil Gramm who, as a senator, was responsible for deregulation in the financial services industries that paved the way for much of this crisis to occur," Reid said. "It was Phil Gramm who pushed legislation through a Republican Senate that allowed firms like Enron to avoid regulation and destroy the life savings of its employees, and it was Phil Gramm’s legislation that now allows Wall Street traders to bid up the price of oil, leaving us to pay the bill."

So, the next time you hear talk about "big government," and deregulation, picture in your minds what will be the inevitable result of a completely free, open and unfettered financial industry upon the American citizens.