Fed's Kroszner: Don't Blame CRA
Federal Reserve governor Randall Kroszner, a conservative economist on leave from a teaching post at the University of Chicago Booth Graduate School of Business, says the Community Reinvestment Act isn’t to blame for the subprime mess, despite some accusations to the contrary.
“First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken together… we believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis,” he said in a speech today in Washington.
The Community Reinvestment Act, which dates to the 1970s, was crafted to combat discrimination and red-lining. It requires regulators to press banks to lend to low-income and minority neighborhoods. Kroszner’s speech summarized research the Fed has been doing on two basic questions: (1) What share of subprime loans were related to CRA? Answer: “Loans that are the focus of the CRA represent a very small portion of the subprime lending market, casting considerable doubt on the potential contribution that the law could have made to the subprime mortgage crisis.” (2) How have CRA-related subprime loans performed relative to other loans. Answer: “[D]elinquency rates were high in all neighborhood income groups, and that CRA-related subprime loans performed in a comparable manner to other subprime loans.”
Fed economists found that about 60% of higher-priced loan originations — the technical definition of subrpime — went to middle- or higher- income borrowers or neighborhoods who aren’t targeted by CRA. More than 20% of the higher-priced loans were extended to lower-income borrowers or borrowers in lower-income areas by institutions that aren’t banks — and aren’t covered by CRA.
The “striking result,” Kroszner said: “Only 6% of all the higher- priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes.”
“This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.” Banks can also meet CRA obligations by buying loans from mortgage brokers, he noted. But less than 2% of the higher-priced loans (those would help banks meet CRA requirements) sold by independent mortgage companies were purchased by CRA-covered institutions.