The Bank Regulator’s View of the Mortgage Crisis and the Community Reinvestment Act

Barry Wides, Deputy Comptroller for Community Affairs for the Office of the Comptroller of the Currency (OCC) will discuss the erroneous connection that has been made between the mortgage crisis and the Community Renivestment Act (CRA) on the May 18 edition of Economic Perspectives, 5:30 p.m. – 6 p.m. on KAZI 88.7 FM.  Enclosed below are selected excerpts from a statement on the mortgage crisis and CRA given by Deputy Comptroller Wides at the public briefing of the United States Commission on Civil Rights on March 20, 2009.

…Let me start off by assuring you, unequivocally, that CRA is not the culprit behind the abuses in subprime mortgage lending nor the broader credit quality issues in the marketplace, as some have suggested. CRA lending and investment has been responsibly underwritten and conducted in a safe and sound manner. The CRA was enacted by Congress in 1977 to encourage banks and thrifts to increase their lending and services to low- and moderate-income persons and areas in their communities consistent with safe and sound banking.  It also requires the federal financial supervisory agencies to assess the record of each covered institution in helping to meet the credit needs of its entire community, including low- and moderate-income individuals and neighborhoods.

Barry Wides

The CRA applies only to banks and savings associations whose deposits are insured by the Federal Deposit Insurance Corporation. Affiliates of insured depositories that are not themselves insured depository institutions are not directly subject to the CRA, nor are credit unions or independent mortgage companies. ..

There has been much public discussion over the past several months concerning whether CRA may have contributed to the mortgage crisis. This discussion has focused on the connection between CRA-related lending to low- and moderate-income borrowers and what some allege to be a disproportionate representation in failing subprime loans.

The OCC and other Federal banking regulatory agencies have been looking at this question in some detail, and all four agencies have concluded that CRA was not responsible for the current mortgage crisis. 3 In analyzing independent studies and comprehensive home lending data sets, we have concluded that only a small portion of subprime mortgage originations are related to the CRA.

CRA-related loans appear to perform comparable to or better than other types of subprime loans. For example, single-family CRA-related mortgages offered in conjunction with NeighborWorks organizations have performed on par with standard conventional mortgages.  Foreclosure rates within the NeighborWorks network were just 0.21 percent in the second quarter of 2008, compared to 4.26 percent of subprime loans and 0.61 percent for conventional conforming mortgages. Similar conclusions were reached in a study by the University of North Carolina’s Center for Community Capital, which indicates that high-cost subprime mortgage borrowers default at much higher rates than those who take out loans made for CRA purposes.  Overwhelmingly, CRA lending has been safe and sound.

The Federal Reserve Board (FRB) has reported extensively on these findings for all CRA loans. A FRB study of 2005 – 2006 Home Mortgage Disclosure Act data showed that banks subject to CRA and their affiliates originated or purchased only six percent of the reported higher-priced loans made to lower-income borrowers within their CRA assessment areas.6 The FRB also found that less than 2 percent of the higher-priced and CRA credit-eligible mortgage originations sold by independent mortgage companies in 2006 were purchased by CRA-covered institutions. FRB loan data analysis also found that 60 percent of higher-priced loan originations went to middle- or higher-income borrowers or neighborhoods and, further, that more than 20 percent of the higher-priced loans extended to lower-income borrowers or borrowers in lower-income areas were made by independent non-bank institutions that are not covered by CRA.

OCC analysis of the lending of banks that we regulate also confirms that the vast majority of subprime loans were not originated by national banks supervised by the OCC. In 2006, subprime lending by national banks amounted roughly to 10 percent of the total of subprime mortgage originations by all lenders.8 Further, our analysis also shows that subprime and Alt-A loans originated by national banks defaulted at a lower rate than those originated by non-bank lenders.9 Our analysis compared the foreclosure start rates for loans originated between 2005 and 2007 that were placed in subprime and Alt-A securities. The loans originated by OCC-regulated institutions defaulted at roughly two-thirds the rate of comparable loans originated by non-bank lenders.

In conclusion, I want to reiterate my belief that CRA has made a positive contribution to community revitalization across the country and has generally encouraged sound community development lending, investment, and service initiatives by regulated banking organizations. Only a small percentage of higher priced loans were originated by CRA-regulated lenders to either lower-income borrowers or in neighborhoods in the banks’ CRA assessment areas. Similarly, banks purchased only a small percentage of higher-priced, CRA-eligible loans originated by independent mortgage companies. Finally, the performance of higher-cost loans originated by national banks is markedly better than loans originated by non-bank institutions…

For the full text of the statement click here.

The Community Reinvestment Act Did Not Cause the Subprime Mortgage Meltdown

By Hopeton Hay

With the crisis in the American banking and finance system, there is a growing chorus of voices attempting to lay some of the blame for the subprime mortgage meltdown at the feet of the Community Reinvestment Act (CRA) and efforts to promote homeownership for low income and minority families.  Last October in a column on the financial crisis called The Roots of Our Disaster in the Austin American Statesman, columnist Scott Burns referred to the Community Reinvestment Act as one of the “Four Horseman of Our Apocalypse.”   He blamed “innovations to mortgages to comply with CRA” charging that it forced “the institutional reduction of lending standards.”

Hopeton Hay

Others have argued that the efforts by Congress, the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, and others to increase homeownership in low income and minority communities played a significant role in the subprime mortgage debacle.  At the same time however, CRA advocates expressed strong concern about the growth of subprime lending in low income and minority communities

If CRA and promoting increased homeownership in the minority community played major role in the subprime disaster, why did that occur now?  CRA has been around since 1977, enforced in earnest since 1989, and enjoyed unprecedented federal support during the Clinton Administration. It was in 1989 that Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), which amended the CRA, giving it more teeth, and required collection of data on home loans by race.  In 1994 HUD launched the National Homeownership Strategy. 

When one reviews the rules of CRA and the concerns expressed by CRA advocates with subprime mortgage lending to minorities it renders those arguments baseless.

So what is CRA and does it require financial institutions to loosen underwriting standards loans to comply?  According to the Community Reinvestment Act and Interstate Deposit Production Regulations, CRA requires federal financial supervisory agencies “to assess an institution’s record of helping to meet the credit needs of the local communities in which the institution is chartered, consistent with the safe and sound operation of the institution, and to take this record into account in the agency’s evaluation of an application for a deposit facility by the institution.”

Well the first thing of note is that CRA applies to depository institutions. According to testimony on CRA provided to the U.S. House of Representatives Financial Services Committee on February 8, 2008 by University of Michigan Law Professor Michael Barr, more than half the subprime mortgages were originated by independent mortgage companies in 2005.  That is half the subprime mortgages were made by lenders not being examined for compliance to CRA. 

The second important fact from the CRA rules is the expectation that credit needs are met in a safe and sound manner.  Now the rules do encourage some underwriting flexibility.  The rules state that “Banks are permitted and encouraged to develop and apply flexible underwriting standards for loans that benefit low- or moderate-income geographies or individuals only if consistent with safe and sound operations.”   Yes, flexibility is encouraged, but not mandated, but it still must be done in a safe and sound manner.  There is a section in CRA rules called safe and sound operations that says “the CRA does not require a bank to make loans or investments or to provide services that are inconsistent with safe and sound operations. “ 

Some of the leading CRA advocates expressed concern about the use of subprime loans long before the meltdown.  Many of them felt that racial minorities and low income communities were being disproportionately targeted by subprime lenders.  In 2002, the Center for Community Change’s Neighborhood Revitalization Project published a report, Risk or Race? Racial Disparities and the Subprime Refinance Market.  In the executive summary of the report, the Center for Community Change declares its concern that “high foreclosure rates for subprime loans indicate that many subprime borrowers are entering into mortgage loans they cannot afford.”

Also in 2002, the Southwest Regional Office of Consumers Union published the report, Minority Subprime Borrowers.  Like the report from the Center for Community Change, the report focused on the disproportionate number of subprime loans being made in minority communities, but examined it from a Texas perspective and looked only at home refinancing. The report recognized the danger of subprime lending saying that,  “Subprime lending can have disastrous consequences for low income and minority communities.”  Consumers Union went even further recommending state legislation that would “require loan counseling for any borrower getting a high cost loan during the existing 12 day waiting period before the loan closes” and “prohibit lending without due regard to repayment ability.”

In the 2005 report by the National Community Reinvestment Coalition (NCRC), The 2005 Fair Lending Disparities: Stubborn and Persistent II, concern about the impact of subprime lending was again the major focus. “Our analysis revealed a disproportionate amount of high-cost lending targeted to vulnerable borrowers and communities…,” wrote NCRC.

“Further,” comments NCRC, “ the pervasiveness of subprime lending in communities of color, in all regions and in metropolitan areas of all sizes, raises important public policy concerns about possible adverse implications stemming from these heavy geographic concentrations.”

As the information above clearly reveals, CRA advocates identified the threat of subprime lending long before it threatened the financial stability of our banking industry and were concerned about its heavy concentration in low income and minority communities.  They clearly did not support market driven subprime lending with little regulation.  Also, while CRA did give banks permission to modify underwriting to meet the lending needs of low to moderate income communities, it was not a requirement, and the regulators made it plain that it should be done in a safe and sound manner.  As articles written recently in the New York Times document, it was the desire for quick and easy profits more than anything that drove many of the decisions that led to the subprime meltdown.

Hopeton Hay is editor and publisher of the Economic Perspectives blog and chairman of the Economic Development Committee of the Texas NAACP.  He also spent 5 1/2 years working for the NAACP Community Development Resource Center, a CRA partnership between the NAACP and Bank of America.

Obama’s Budget Will Double Funding for Community Development Financial Institututions in FY 2010 If Approved

President Obama’s fiscal year (FY) 2010 budget more than doubles funding for the Community Development Financial Institutions (CDFI) Fund. The President’s budget requests $243.6 million for the CDFI Fund – a 127 percent increase over the $107 million appropriated for FY 2009.

The CDFI Fund expands the capacity of financial institutions to provide credit, capital, and financial services to underserved populations and communities in the United States.

Donna Gambrell

“The President’s 2010 budget request for the CDFI Fund clearly demonstrates a strong commitment of support to our critical mission of serving distressed communities,” said CDFI Fund Director Donna J. Gambrell. “Beyond the increased funding for our current programs, the inclusion of funding for the Native Initiatives, Capital Magnet Fund, a new research initiative, and proposed legislative enhancements, will all work together to expand the CDFI Fund’s ability to further economic development in communities most in need.”

Highlights of the 2010 budget request for the CDFI Fund include:

• $243.6 million for the CDFI Fund, which represents a 127 percent increase in total funding;
• $113.6 million, a 90 percent increase in funding for the CDFI Program to boost investments and other financial services in underserved communities;
• $80 million for the Capital Magnet Fund, a newly authorized program to increase capital investment for the development, preservation, rehabilitation, or the purchase of affordable housing for low-, very low-, and extremely low-income families;
• The first Administration budget to specifically include funding ($10 million) for the CDFI Fund’s Native Initiatives, which assist Native Communities (Native American, Alaskan Native and Native Hawaiian communities) to overcome certain barriers to financial services;
• A new research initiative to conduct strategic research that will analyze the impact and outcomes of the CDFI Fund’s programs, including the effect of changing economic conditions; and
• Legislative enhancements to the CDFI Fund’s programs to enable greater access to capital for distressed communities

For more information onthe CDFI Fund FY 2010 proposed budget and its justification, click here.

$2 Billion in Federal Grants Available to Stabilize Neighborhoods With High Foreclosure Rate

U.S. Housing and Urban Development (HUD) Secretary Shaun Donovan announced that HUD is now soliciting grant applications under the Department’s Neighborhood Stabilization Program (NSP) to make available nearly $2 billion in Recovery Act funding to states, local governments and non-profit housing developers to combat the effects of home foreclosures. Applications for NSP funds will be due July 17, 2009.

HUD Secretary Shaun Donovan

Funded under the American Recovery and Reinvestment Act of 2009, this round of NSP funding will award grants to applicants who will target their efforts in areas with the greatest extent of abandoned and foreclosed homes. In addition, HUD will provide up to $50 million in technical assistance grants to help grantees better manage their neighborhood stabilization programs. Applications for NSP technical assistance will be due June 8, 2009.

“HUD is committed to getting these funds out quickly and effectively to help communities recover from the blight and vacancies that have become visual symbols of difficult economic times,” said Donovan. “We have much more work to do to mitigate the impacts that foreclosures have had on local communities; however, innovative collaborations between local government, housing agencies, and non-profits and creative, green-focused uses of federal funds will create jobs and put us on the path to recovery.”

HUD has already allocated nearly $4 billion in NSP grants to help state and local governments respond to rising foreclosures and falling home values. The additional $2 billion in NSP grants that HUD is making available today will further assist these state and local governments, as well as non-profit developers, to acquire land and property; to demolish or rehabilitate abandoned properties; and/or to offer downpayment and closing cost assistance to low- to middle-income homebuyers. Grantees can also stabilize neighborhoods by creating “land banks” to assemble, temporarily manage, and dispose of foreclosed homes.

The NSP Program also seeks to prevent future foreclosures by requiring housing counseling for families receiving homebuyer assistance. In addition, the Agency seeks to protect future homebuyers by requiring States and local grantees to ensure that new homebuyers under this program obtain a mortgage from a lender who agrees to comply with sound lending practices.

HUD is also offering up to $50 million in technical assistance grants to help NSP grantees to more effectively manage the inventory of foreclosed homes they purchase under the Neighborhood Stabilization Program. Once awarded, HUD’s NSP technical assistance grants will help NSP recipients to:

• Implement sound underwriting, management, and fiscal controls;
• Measure outcomes in the use of public funds through accurate and timely reporting;
• Build the capacity of public-private partnerships;
• Develop strategies to serve low-income households; and
• Incorporate energy efficiency into State and local NSP programs.
• Provide support, technical assistance, and training on the operation and management of ‘land banks; and
• Train NSP recipients and their subgrantees on HUD program rules and financial management requirements.

In addition, Secretary Donovan and the Department are committed to providing the highest level of transparency possible as Recovery Act funds are spent quickly and efficiently. It is vitally important that the American people are fully aware of how their tax dollars are being spent and can hold their federal leaders accountable. Every dollar of Recovery Act funds HUD spends can be reviewed and tracked at HUD’s Recovery Act website.  The full text of HUD’s funding notices and tracking future performance of these grants is also available at HUD’s Recovery Act website.

HUD is the nation’s housing agency committed to sustaining homeownership; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development and enforces the nation’s fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov.