Conservative pundits have tried to blame the subprime meltdown on the Community Reinvestment Act, a 1977 law requiring banks to meet the credit needs of low- to moderate-income neighborhoods and borrowers. From the National Review to talk-radio, the conservative echo-chamber has repeated this argument for months without facts to back it up.
Most informed observers, including Federal Reserve Board Governor Randall Kroszner, now agree that this “blame CRA” argument has no merit. Recently, the Federal Reserve Banks of Boston and San Francisco jointly published a collection of articles and commentary, “Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act.” The authors offer many suggestions for how to move forward with a 32-year-old law in a rapidly changing financial services marketplace. It is an important contribution to what is expected to follow this year in Congress – a debate about the future regulation of financial services in the United States, including banks, credit unions, mortgage companies, insurers, and government-sponsored enterprises.
Massachusetts has already grappled with some of these issues and may hold some clues for policymakers in D.C. trying to design a regulatory system that will protect consumers well into the future. In 2007, Massachusetts became the first state in the nation to extend CRA-like responsibilities to mortgage companies. Last year, our Division of Banks published regulations on this new law and this spring will begin CRA examinations of the first mortgage companies to be covered.
In the 1990s, Massachusetts lawmakers passed two bills concerning insurance companies and activity in low- and moderate-income neighborhoods. One law requires the top 25 property insurance companies to publicly report where they write policies by zip code. This information is helpful in determining whether a company is “redlining” certain geographic areas and has led to several companies offering discounts to homeowners who take a post-purchase class designed to help owners maintain their investment for years to come.
A second insurance bill passed in 1998 and created two CRA-like investment entities that provide innovative and low-cost financing to affordable housing developments, child-care facilities, and small businesses in low to moderate income neighborhoods throughout the state. To date, over $300 million has been invested by The Life Initiative and the Property Casualty Initiative to benefit deserving projects statewide.
Going back to 1982, Massachusetts is still the only place that has CRA coverage of state-chartered credit unions as well as banks. Our state has benefited greatly from having community organizations use the CRA aggressively and having the financial services industry respond with sustainable products that have stood the test of time.
Follow Our Lead
One state cannot do it alone, however, and today’s environment gives our federal lawmakers a chance to support the many local partnerships that exist in our state. There are many possible improvements to federal oversight of financial services but two stand out as very important to Massachusetts consumers.
The time has come to close the loophole in CRA that requires Bank of America, Citibank, Sovereign/Santander, RBS Citizens, and a host of local banks to responsibly meet the credit needs of low income communities but allows Wells Fargo and other large banks that lend here – but do not branch here – to ignore community reinvestment obligations. Only action from Washington can close this rather obvious inequity.
Much attention will be devoted this year to the future of Fannie Mae and Freddie Mac. At their best, Fannie and Freddie helped banks meet the needs of many local homebuyers and homeowners through buying loans on the secondary market. But for years, local banks have complained that many CRA loans would have to stay in bank portfolios because of either the pricing or terms of these loans. Local investors, such as Savings Bank Life Insurance and The Life Initiative, have found that they can buy these discounted mortgages on the secondary market and realize a modest but stable rate of return. Why can’t our government-sponsored enterprises do the same? Fannie and Freddie chased profits through the subprime market that proved to be elusory. Now we need the new Fannie and Freddie to be refocused on serving lower income homebuyers with truly affordable and sustainable products.
Thomas M. Callahan is executive director of the Massachusetts Affordable Housing Alliance, based in Dorchester.
