CRA Myth and Fact

Myth: The Community Reinvestment Act (CRA) caused the foreclosure crisis.

The majority of subprime loans were originated by non-CRA covered financial institutions. In fact, only about 25 percent of sub-prime loans were made by institutions covered by CRA.¹

CRA was passed in 1977.  The explosive growth in subprime lending occurred more than two decades later, nearly doubling from 2001-2006 alone.  No major changes to CRA were enacted during this time.
CRA does not mandate banks to make only home loans. Banks are encouraged to examine credit needs and lend appropriately based on these needs (for small business, home, and other types of loans).
CRA penalizes banks for reckless, irresponsible and otherwise predatory lending.

Myth: Rapid growth of subprime loans was a direct response to financial institutions efforts to expand homeownership for low and moderate and minority households.
Between 1998-2006 over half of subprime mortgage originations were for refinancing.² 
In that same time, less than 10% of subprime mortgage originations went to first time homebuyers.³

Significant gains in homeownership occurred in the 1990s when prime lending was offered to low and moderate income and minority borrowers.

Myth: Federal banking agencies encouraged banks to engage in risky lending practices. In particular, a 1992 Boston Federal Reserve Bank publication, Closing the Credit Gap: A Guide to Equal Opportunity Lending, provided unsound advice to banks.

Federal Reserve Guidance: Lack of credit history should not be seen as a negative factor for potential homebuyers.

Justification: Willingness to pay debt promptly can be determined through alternative sources of information including timely rent, utility bills, and other scheduled payments.
Foreclosure Reality: Foreclosures are not a result of alternative credit scoring, but rather the product of excessive interest rates and unearned fees making loans unaffordable.

Federal Reserve Guidance: Valid income sources may include social security, second jobs, and other sources.
Justification: Many low to moderate-income households have varying sources but consistent or rising levels income throughout the year.

Foreclosure Reality: Subprime loans are not failing as a result of the use of alternative sources of income. Rather, problematic subprime loans are characterized by a lack of income verification, not source of income.

UPDATE In response to recent coordinated efforts in the media and elsewhere to hold the Community Reinvestment Act (CRA) responsible for the current financial crisis, NCRC, along with a coalition of civil rights, consumer, community development and housing groups are working together to call attention to the real reason for the crisis: failed regulatory oversight.  

More than 100 organizations have signed on to a joint statement in support of the Community Reinvestment Act.
Click here to read  the statement.

  ¹Testimony before the House Financial Services Committee, Michael Barr, February 13, 2008.
  ²Subprime Lending is a Drain on Homeownership, Center for Responsible Lending March 27, 2007
  ³Subprime Lending is a Drain on Homeownership, Center for Responsible Lending March 27, 2007

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