Community Reinvestment Act

The Community Reinvestment Act (CRA) was originally enacted under President Carter in 1977 in an effort to encourage banks to halt the practice of lending discrimination. In 1995 the Clinton Administration issued regulations that added numerical guidelines, urged lending flexibility, and instructed bank examiners to evaluate a bank’s responsiveness to community activists (such as ACORN) when deciding whether to approve bank merger or expansion requests. Critics claim that the 1995 changes to CRA signaled to banks that relaxed lending standards were appropriate and could minimized potential risk of governmental sanctions.

Conservatives and libertarians have debated the possible effects of the Community Reinvestment Act (CRA), with detractors claiming that the Act encouraged lending to uncreditworthy borrowers,[137][138][139][140] and defenders claiming a thirty year history of lending without increased risk.[141][142][143][144] Detractors also claim that amendments to the CRA in the mid-1990s, raised the amount of mortgages issued to otherwise unqualified low-income borrowers, and allowed the securitization of CRA-regulated mortgages, even though a fair number of them were subprime.[145][146]

The Financial Crisis Inquiry Commission reported in January 2011 that "the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans – a proxy for subprime loans – had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law."[63] Critics claim that the use of the high-interest-rate proxy distorts results because government programs generally promote low-interest rate loans – even when the loans are to borrowers who are clearly subprime.[147] Several economist maintain that Community Reinvestment Act loans outperformed other "subprime" mortgages, and GSE mortgages performed better than private label securitizations.[1][26]