he Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.
The CRA's premise sounds unassailable: helping the poor buy and keep homes will stabilize and rebuild city neighborhoods. As enforced today, though, the law portends just the opposite, threatening to undermine the efforts of the upwardly mobile poor by saddling them with neighbors more than usually likely to depress property values by not maintaining their homes adequately or by losing them to foreclosure. The CRA's logic also helps to ensure that inner-city neighborhoods stay poor by discouraging the kinds of investment that might make them better off.
The Act, which Jimmy Carter signed in 1977, grew out of the complaint that urban banks were "redlining" inner-city neighborhoods, refusing to lend to their residents while using their deposits to finance suburban expansion. CRA decreed that banks have "an affirmative obligation" to meet the credit needs of the communities in which they are chartered, and that federal banking regulators should assess how well they do that when considering their requests to merge or to open branches. Implicit in the bill's rationale was a belief that CRA was needed to counter racial discrimination in lending, an assumption that later seemed to gain support from a widely publicized 1990 Federal Reserve Bank of Boston finding that blacks and Hispanics suffered higher mortgage-denial rates than whites, even at similar income levels.
In addition, the Act's backers claimed, CRA would be profitable for banks. They just needed a push from the law to learn how to identify profitable inner-city lending opportunities. Going one step further, the Treasury Department recently asserted that banks that do figure out ways to reach inner-city borrowers might not be able to stop competitors from using similar methods—and therefore would not undertake such marketing in the first place without a push from Washington.
None of these justifications holds up, however, because of the changes that reshaped America's banking industry in the 1990s. Banking in the 1970s, when CRA was passed, was a highly regulated industry in which small, local savings banks, rather than commercial banks, provided most home mortgages. Regulation prohibited savings banks from branching across state lines and sometimes even limited branching within states, inhibiting competition, the most powerful defense against discrimination. With such regulatory protection, savings banks could make a comfortable profit without doing the hard work of finding out which inner-city neighborhoods and borrowers were good risks and which were not. Savings banks also had reason to worry that if they charged inner-city borrowers a higher rate of interest to balance the additional risk of such lending, they might jeopardize the protection from competition they enjoyed. Thanks to these artificially created conditions, some redlining of creditworthy borrowers doubtless occurred.
The insular world of the savings banks collapsed in the early nineties, however, the moment it was exposed to competition. Banking today is a far more wide-open industry, with banks offering mortgages through the Internet, where they compete hotly with aggressive online mortgage companies. Standardized, computer-based scoring systems now rate the creditworthiness of applicants, and the giant, government-chartered Fannie Mae and Freddie Mac have helped create huge pools of credit by purchasing mortgage loans and packaging large numbers of them together into securities for sale to bond buyers. With such intense competition for profits and so much money available to lend, it's hard to imagine that banks couldn't instantly figure out how to market to minorities or would resist such efforts for fear of inspiring imitators. Nor has the race discrimination argument for CRA held up. A September 1999 study by Freddie Mac, for instance, confirmed what previous Federal Reserve and Federal Deposit Insurance Corporation studies had found: that African-Americans have disproportionate levels of credit problems, which explains why they have a harder time qualifying for mortgage money. As Freddie Mac found, blacks with incomes of $65,000 to $75,000 a year have on average worse credit records than whites making under $25,000.
The Federal Reserve Bank of Dallas had it right when it said—in a paper pointedly entitled "Red Lining or Red Herring?"—"the CRA may not be needed in today's financial environment to ensure all segments of our economy enjoy access to credit." True, some households—those with a history of credit problems, for instance, or those buying homes in neighborhoods where re-selling them might be difficult—may not qualify for loans at all, and some may have to pay higher interest rates, in reflection of higher risk. But higher rates in such situations are balanced by lower house prices. This is not a conspiracy against the poor; it's how markets measure risk and work to make credit available.
Nevertheless, until recently, the CRA didn't matter all that much. During the seventies and eighties, CRA enforcement was perfunctory. Regulators asked banks to demonstrate that they were trying to reach their entire "assessment area" by advertising in minority-oriented newspapers or by sending their executives to serve on the boards of local community groups. The Clinton administration changed this state of affairs dramatically. Ignoring the sweeping transformation of the banking industry since the CRA was passed, the Clinton Treasury Department's 1995 regulations made getting a satisfactory CRA rating much harder. The new regulations de-emphasized subjective assessment measures in favor of strictly numerical ones. Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A's for effort. Only results—specific loans, specific levels of service—would count. Where and to whom have home loans been made? Have banks invested in all neighborhoods within their assessment area? Do they operate branches in those neighborhoods?
Crucially, the new CRA regulations also instructed bank examiners to take into account how well banks responded to complaints. The old CRA evaluation process had allowed advocacy groups a chance to express their views on individual banks, and publicly available data on the lending patterns of individual banks allowed activist groups to target institutions considered vulnerable to protest. But for advocacy groups that were in the complaint business, the Clinton administration regulations offered a formal invitation. The National Community Reinvestment Coalition—a foundation-funded umbrella group for community activist groups that profit from the CRA—issued a clarion call to its members in a leaflet entitled "The New CRA Regulations: How Community Groups Can Get Involved." "Timely comments," the NCRC observed with a certain understatement, "can have a strong influence on a bank's CRA rating."
The Clinton administration's get-tough regulatory regime mattered so crucially because bank deregulation had set off a wave of mega-mergers, including the acquisition of the Bank of America by NationsBank, BankBoston by Fleet Financial, and Bankers Trust by Deutsche Bank. Regulatory approval of such mergers depended, in part, on positive CRA ratings. "To avoid the possibility of a denied or delayed application," advises the NCRC in its deadpan tone, "lending institutions have an incentive to make formal agreements with community organizations." By intervening—even just threatening to intervene—in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, "CRA is the backbone of everything we do."
In addition to providing the nonprofits with mortgage money to disburse, CRA allows those organizations to collect a fee from the banks for their services in marketing the loans. The Senate Banking Committee has estimated that, as a result of CRA, $9.5 billion so far has gone to pay for services and salaries of the nonprofit groups involved. To deal with such groups and to produce CRA compliance data for regulators, banks routinely establish separate CRA departments. A CRA consultant industry has sprung up to assist them. New financial-services firms offer to help banks that think they have a CRA problem make quick "investments" in packaged portfolios of CRA loans to get into compliance
