Myth: The Community Reinvestment Act (CRA) caused the foreclosure crisis.
Facts:
- The majority of subprime loans were originated by non-CRA covered financial institutions. In fact, institutions covered by CRA made only about 6 percent of sub-prime loans.1
- CRA was passed in 1977. The explosive growth in subprime lending occurred more than two decades later, nearly doubling from 2001-2006 alone. No major changes to CRA were enacted during this time.
- CRA does not mandate banks to make only home loans. Banks are instead encouraged to examine credit needs and lend appropriately based on those needs (for small business, home, and other types of loans).
- CRA penalizes banks for reckless, irresponsible and otherwise predatory lending.
Myth: Rapid growth of subprime loans was a direct response to financial institutions’ efforts to expand homeownership for low and moderate income and minority households.
Facts:
- Between 1998-2006 over half of subprime mortgage originations were for refinancing.²
- In that same time, less than 10% of subprime mortgage originations went to first time homebuyers.³
- Significant gains in homeownership occurred in the 1990s when prime lending was offered to low and moderate income and minority borrowers.
Myth: Federal banking agencies encouraged banks to engage in risky lending practices.
Facts:
The Federal Reserve has advised that alternative credit information factors (such as timely rent and other scheduled payments), and varying income sources (such as income from Social Security or second jobs) can be used to help determine willingness and ability to pay debt. In fact, many households have varying sources that contribute to consistent or rising levels of income throughout the year.
- Alternative credit scoring does not cause foreclosures. Foreclosures are the product of excessive interest rates and unearned fees that are making loans unaffordable.
- Subprime loans are not failing as a result of the use of alternative sources of income. Problematic subprime loans are characterized by a lack of income verification, not source of income.
¹Testimony before the House Financial Services Committee, Michael Barr, February 13, 2008.
²Subprime Lending is a Drain on Homeownership, Center for Responsible Lending March 27, 2007
³Subprime Lending is a Drain on Homeownership, Center for Responsible Lending March 27, 2007
A Statement of facts
In response to recent coordinated efforts in the media and elsewhere to hold the Community Reinvestment Act (CRA) responsible for the current financial crisis, NCRC, along with a coalition of civil rights, consumer, community development and housing groups are working together to call attention to the real reason for the crisis: failed regulatory oversight.
More than 260 organizations have signed on to a joint statement in support of the Community Reinvestment Act.
Click here to read the statement.
