Economic Perspectives with Hopeton Hay on KAZI 88.7 FM in Austin, TX

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

Posted by Hopeton on May 15, 2009

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

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.

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