the Future of Change

Forty-one years ago, Congress passed the landmark Community Reinvestment Act (CRA), a law that has spurred billions of dollars in investment in low- and moderate-income neighborhoods throughout the United States, neighborhoods that had long been neglected, and outright discriminated against, for decades, denying their residents the chance to achieve the American Dream.

But now that law, and that dream, is under attack, as Congress may be considering measures to “modernize” the CRA, mostly by gutting some its most important protections.  The truth is, the CRA needs to be modernized. Created in a time when banks were still brick-and-mortar institutions, the CRA was designed to prevent banks from denying loans to the communities where they had their branches and stop them from taking deposits from those communities and converting them into investment in other communities.  When a new breed of banks and lenders came on the scene in the late 1990s that largely operated beyond the CRA’s reach, those risky banks and the products they peddled would usher in the Financial Crisis of 2008.  Indeed, constructed to address bank practices from a bygone era in some ways, the CRA was poorly designed to prevent these new entities from wrecking the economy. Truth be told, in many respects, the CRA was a financial Maginot Line; built to fight the last war, it was easily circumvented, lightly defended, and quickly overrun.

Advocates and opponents of the CRA alike agree that the law needs amending.  It was not a cause of the Financial Crisis though: critics charge, wrongly, that it somehow forced banks to make risky loans.  It did not. To the contrary, the problem was not that the CRA was too strong, but too weak.  For example, at the heart of the Financial Crisis were subprime loans.  And at the height of the subprime mortgage frenzy of the last decade, ninety-four percent of such loans were not even covered by the CRA because of its many loopholes.  It is hard to argue that 6% of subprime loans—the percentage covered by the CRA—were the cause of the global crisis.

As Congress considers amending the law that is in desperate need of modernization, there is no shortage of recommendations on how to strengthen it.  Check out the excellent work of the National Community Reinvestment Coalition on this topic here.  I’ve written a bit about this topic too. See here, here, and here.

You can also check out the New York Bank Ratings Index, which puts the power of bank oversight directly in consumers’ hands here.  An explanation of the Index can be found here.