From the Business Week website:
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”
The article continues:
Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley (PDF file here).
And if we want to point fingers:
Better targets for blame in government circles might be the 2000 law which ensured that credit default swaps would remain unregulated [another Phil Gramm special], the SEC’s puzzling 2004 decision to allow the largest brokerage firms to borrow upwards of 30 times their capital and that same agency’s failure to oversee those brokerage firms in subsequent years as many gorged on subprime debt. (Barry Ritholtz had an excellent and more comprehensive survey of how Washington contributed to the crisis in this week’s Barron’s.)
Yesterday, Spot wrote about Fishsticks' assertion that while the CRA did not cause the financial crisis, per se, it was just another invidious interference in an unfettered free market where "market discipline" is allowed to operate. Spot says that the last quoted paragraph above is a pretty good example of how much discipline the market really has on its own.
The excellent journalists and writer Sara Robinson has a recent web article: Firing Back on the CRA Libel. Highly recommended. Especially for adamsmith.
A thump of the tail to Ollie for the link to the Business Week piece.