By Orson Aguilar
It has been fascinating to observe the reactions of anti-regulation zealots to the film “Inside Job.” Many — including Paul Sperry in his Nov. 18 column on this page, “10 Reasons You Should Not Waste Your Money On Film ‘Inside Job,'” — have resorted to constructing a sort of alternate economic history of the past 20 years.
In this alternate history, the culprit behind the subprime mortgage meltdown and ensuing economic crisis wasn’t deregulated investment banks or speculators taking absurd risks. Instead, it was the poor, aided and abetted by advocates like us at the Greenlining Institute who worked to get the less wealthy among us an even break.
Reading this alternate history is a bit like browsing the Flat Earth Society’s Web site. It’s fascinating and oddly compelling, and even has a sort of internal logic. But it doesn’t match reality.
The lead villain in this scenario is the Community Reinvestment Act, which allegedly forced banks and other lenders to make risky loans to unqualified borrowers just because they lived in poor or minority neighborhoods. But CRA did no such thing.
Indeed, three quarters of those risky subprime mortgages were made by independent mortgage brokers or other institutions not subject to CRA. And banks subject to CRA were two-thirds less likely to offer borrowers the sorts of high-cost mortgages that forced too many homeowners into foreclosure.
Sperry carefully tiptoes around inconvenient details, such as the fact that CRA specifically requires banks’ actions to be “consistent with … safe and sound operation.” A study released last year by the Federal Reserve Bank of San Francisco found that independent mortgage companies — outside the reach of CRA and other federal “safety and soundness” regulations — “originated a disproportionate share of loans in lower-income and minority neighborhoods.”
There is a broad consensus among experts that CRA did not cause the foreclosure crisis. Federal Reserve Governor Randall S. Kroszner has stated, “We believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.” FDIC chair Sheila Bair has declared CRA “not guilty.”
Nothing in CRA — including the Clinton-era regulatory changes that outrage Sperry — has ever required lenders to make bad loans. But Clinton did make one massive mistake: He supported deregulation of the financial industry that opened the floodgates to all sorts of dubious practices, in part by separating lenders from the consequences of their underwriting decisions.
That led to predatory actions that often targeted communities of color. According to the Fed study, black and Hispanic borrowers were four times as likely to receive a high-priced loan as white borrowers with comparable credit scores. The researchers concluded that “this trend of higher-priced lending coupled with minimal regulatory oversight has led to devastating impacts on communities of color in California.”
So yes, many minority borrowers were put into subprime loans when they could have qualified for prime loans, and that contributed to the disproportionate foreclosure rates in these communities. Those who try to conflate loans to minority borrowers with risky or “dodgy” mortgages are simply not doing their homework.
As for the Greenlining Institute, starting in the early ’90s we did push Countrywide Financial and other lenders on lending to minority communities, but our efforts were focused completely on prime lending. As early as 1999, we met with Fed chair Alan Greenspan and criticized his laissez-faire attitude toward the subprime market.
But “subprime” does not have to equate with “predatory.” There are plenty of ways to lend to lower-income people that are responsible, sustainable and ethical. It was deregulation that set loose the predatory dogs.
And when we saw that predatory lending was becoming rampant, we tried again, convening a meeting in 2004 with the 15 largest institutions engaged in adjustable rate mortgages, including Countrywide. We warned them about the dangers of the path they were on and pushed them to adopt a more responsible and sustainable model. We got nowhere, and again took our case to Greenspan — still without success.
In retrospect, it clearly wasn’t enough. We should have yelled longer and louder and more publicly.
Still, “Inside Job,” though not without flaws, got it basically right: The problem is not — and never was — lending to minorities or those with relatively modest means. The problem is deregulation that let speculation and unethical practices run wild, permitting vulnerable communities to be targeted.
We now have a chance to do better. The new Consumer Financial Protection Bureau offers a chance to rein in these excesses while preserving fairness and opportunity. Those trying to gut the new bureau before it gets off the ground are putting our whole economy at risk.