Dugan: CRA Had Nothing to Do with Mortgage, Credit Mess

Comptroller of the Currency John Dugan on Wednesday said he disagrees with suggestions that the Community Reinvestment Act is responsible for the ongoing credit crisis. “CRA is not the culprit behind the subprime mortgage lending abuses, or the broader credit quality issues in the marketplace,” Dugan said in a speech at the Enterprise Annual Network Conference on Tuesday afternoon. Criticized largely by conservative members of the GOP as promoting predatory lending practices, the Community Reinvestment Act — or CRA — is a federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. “Through CRA, banks were strong-armed to make risky loans and threatened with fines of up to $500,000 per violation if they didn’t reach government quotas,” wrote Mark Hillman, a Republican and former majority leader in the Colorado state Senate, in a recent op-ed published in late October. “Banks were encouraged to hire ‘community groups,’ like ACORN, to find ‘qualified’ borrowers.” A handful of Republican lawmakers also sent a letter to the U.S. attorney general in October, as well, asking for an investigation into Fannie Mae (FNM) and Freddie Mac (FRE) and blaming in part “overzealous lending under the auspices of the Community Reinvestment Act.” Hogwash, said Dugan. “The lenders most prominently associated with subprime mortgage lending abuses and high rates of foreclosure are lenders not subject to CRA,” he said in his speech. “A recent study of 2006 Home Mortgage Disclosure Act data showed that banks subject to CRA and their affiliates originated or purchased only six percent of the reported high cost loans made to lower-income borrowers within their CRA assessment areas.”. Over the last decade, CRA helped double lending by banking institutions to small businesses and farms to more than $2.6 trillion, and it has helped triple community development lending to $371 billion, Dugan argued. These CRA projects often act as catalysts for other investments, job creation and housing development, the Comptroller argued. Dugan also said that many CRA equity investments can be made under the national banks’ public welfare investment authority. “These bank investments have grown significantly over the years — totaling more than $25 billion over the past decade,” Dugan said. “To meet this demand, OCC successfully sought legislation last year to raise the cap on public welfare investments from 10 to 15 percent of a bank’s capital and assets. This rise will enable the amount of such investments to increase by as much as $30 billion.” Dugan said that CRA lending has generally been safe and sound. For example, he said, 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 this year, compared to 4.26 percent of subprime loans and 0.61 percent for conventional conforming mortgages,” he said. “As the credit market stabilizes, CRA-driven initiatives can also help us tackle such challenges as the preservation of homeownership opportunities and rental housing development.” Read his comments. Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.