Anatomy of a Financial Crisis – The CRA and ACORN

There can be little doubt that the current financial crisis in this country can be attributed to the collapse of the housing market. But what created the conditions that allowed the whole subprime mortgage industry to flourish?

Familiarize yourself with the Community Reinvestment Act as revised in 1995.

First a little background from the Federal Reserve:

Concerns about the deteriorating condition of America’s cities, particularly lower-income neighborhoods, led to the enactment of the Community Reinvestment Act in 1977. Many advocates for the passage of this new law believed that this deterioration was fueled by, among other things, limited credit availability. Some blamed the lack of credit availability on mainstream depository institutions, and charged that they were willing to accept insured deposits from households and small businesses in lower-income neighborhoods but unwilling to lend or invest in those same neighborhoods despite the presence of creditworthy consumers.

A number of factors, including an undeveloped secondary mortgage market, the lack of a comprehensive national credit reporting system, more costly credit evaluation methods, and unlawful redlining were all put forward to explain why credit to lower-income neighborhoods was limited at the time of the CRA’s passage.

. . .

In passing the CRA, Congress reaffirmed the long-standing principle that insured depository institutions must serve “the convenience and needs” of the communities in which they are chartered to do business, which included meeting their credit needs.

. . .

The CRA is actually one of several laws intended to reduce credit-related discrimination, expand access to credit, and shed light on lending activity. The CRA itself focuses on the provision of credit to low- and moderate-income communities.

. . .

The debate surrounding the passage of the CRA was contentious, with critics charging that the law would distort credit markets, create unnecessary regulatory burden, lead to unsound lending, and cause the governmental agencies charged with implementing the law to allocate credit. (emphasis added)

. . .

The CRA regulations were substantially revised again in 1995, in response to a directive to the agencies from President Clinton to review and revise the CRA regulations to make them more performance-based, and to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden. This directive addressed criticisms that the regulations, and the agencies’ implementation of them through the examination process, were too process-oriented, burdensome, and not sufficiently focused on actual results. The agencies also changed the CRA examination process to incorporate these revisions.

In other words, objective standards went out the window and this law became “performance-based”  — i.e. outcome based.  Now, here is where “community organizers” come into the picture:

Public Involvement
To ensure a broad and balanced CRA assessment, examiners routinely conduct interviews with local business people, government officials, housing and consumer advocates, realtors, trade association representatives, and many others. The purpose of these interviews is to obtain information about, among other things, general credit needs of the community, the availability or the lack of availability of credit, and how different institutions respond to those credit needs. The comments of these individuals are factored into the examiners’ CRA rating. (emphasis added)

The community also has other opportunities to participate in the CRA evaluation process. The public can offer comments on an institution’s CRA performance and those comments are publicly available. Examiners review the institution’s public comment file and take comments into account when evaluating an institution’s overall CRA performance. To assist the public, and to encourage public comments, the agencies inform the public every calendar quarter of upcoming CRA examinations.

Yes, this is the sort of thing that community organizers involve themselves in, particularly under the guise of fighting “red-lining.”

Red-lining is wrong and this is a legitimate area for community organizers to be involved. No community should ever be denied access to credit on a blanket basis. However, that does not mean loans should have been granted to people without the financial ability to meet their obligations.  Unfortunately, the CRA, particularly after the 1995 revisions, led to such lending practices not only by CRA-regulated institutions, but to the adoption of such practices industry-wide.

Why?  Well, groups like ACORN (Association of Community Organizations for Reform Now) would do the following for example:

The 1990 ACORN convention in Chicago focused on the fast-breaking housing campaign. It featured a squatting demonstration at an RTC house. Later, ACORN members demanded cooperation from banks about providing loan data on low- and moderate-income communities and compliance with the 1977 Community Reinvestment Act (CRA).

ACORN fought weakening of the CRA in 1991, staging a two-day takeover of the House Banking Committee hearing room. It also established ACORN Housing Corporation to service people moving into homes under the housing campaign, rehabilitated hundreds of houses addressed by CRA.

The ACORN convention in New York in 1992, called the “ACORN-Bank Summit”, was organized to make deals with giant banks. When Citibank, the nation’s largest bank, did not participate conventioneers protested at its downtown Manhattan headquarters, and won a meeting to negotiate for similar programs.

By filing a CRA complaint or simply threatening to file such a complaint, community organizers from groups like ACORN could force banks to issue risky loans and mortgages. Such complaints could hold up regulatory approval of mergers and acquisitions for the lending institutions involved, so it was to their advantage to go along with whatever the community organizers wanted.  Call it legalized extortion if you prefer.

So, did I mention that Barry Obama worked as community organizer for ACORN in both NYC and Chicago?  Well, he did.  Yes, the same ACORN that has engaged in widespread voter fraud in many swing states (with some of their employees being convicted) and just yesterday was accused in the Detroit Free Press of engaging in such activity in Michigan.

ACORN is just one more shady association in a long line of them for Barry Obama ranging from the Rev. Jeremiah Wright to Bill Ayers to Tony Rezko.  But not until today did I ever consider the role that community organizers have played in the housing crisis.  Perhaps if some of these financial institutions had stood up to the likes of ACORN and not buckled, we wouldn’t be in this mess.  There is plenty of blame to go around and no involved party should be discounted.