The New York Times
October 15, 2008

In recent weeks, Republicans in Congress have been blaming a lot of things, besides themselves, for the subprime mortgage debacle. And many of these same Republicans have long wanted to abolish the Community Reinvestment Act, a landmark law that helped to rebuild some of the nation’s most desolate communities by requiring banks to lend, invest and open branches in low-income areas that had historically been written off.

These two goals have converged in a new attempt to blame the law for the financial crisis.

The act, passed in 1977, is one of the most successful community revitalization programs in the country’s history. According to a recent report by the National Community Reinvestment Coalition, an advocacy group in Washington, the act has encouraged lenders to invest more than $4.5 trillion in minority and low-income areas.

This money helped to remake devastated neighborhoods like the South Bronx, helping to finance new housing and businesses. It has helped provide essential services in such neighborhoods, including medical centers and housing for the elderly and disabled – projects that the private sector too often refused to back.

But you can hardly pick up a newspaper or turn on the television these days without hearing critics argue that the act created the current mess we’re in by forcing banks to lend to people in poor areas who were bad credit risks. Representative Steve King of Iowa has introduced legislation that would repeal the act.

The charges do not hold up. First, how could a 30-plus-year-old law be responsible for a crisis that has occurred only in recent years? Then there’s the fact that the regulatory guidance issued under the reinvestment act and other banking laws actually impose restraints on the riskiest kinds of subprime lending.

In addition, subprime lending was not driven by banks, which are covered by the act. Rather, most subprime lending was driven by independent mortgage lending companies, which the act does not cover, and, to a lesser extent, by bank affiliates and subsidiaries that are not fully covered by the act. By some estimates, nonbank lenders and bank affiliates and subsidiaries may have originated 75 percent or more of the riskiest subprime loans.

A study released this week by the Center for Community Capital at the University of North Carolina in Chapel Hill shows that people of similar financial profiles were three to five times more likely to default when they received high-priced subprime mortgages than when they got bank loans made under the Community Reinvestment Act.