Center for American Progress

The Community Reinvestment Act Didn’t Cause the Financial Crisis

The Community Reinvestment Act Didn’t Cause the Financial Crisis

The argument that the Community Reinvestment Act is the cause of the subprime mortgage mess doesn't hold up.

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One particularly strained attempt to misdirect blame for the current financial mess is to point the finger at the Community Reinvestment Act, a law passed in 1977 intended to eradicate discrimination in lending. Fringe right-wing blogs first started spreading the idea that the root cause of the crisis was that CRA forced banks into making imprudent loans to exceptionally risky borrowers.

This argument doesn’t hold up. First and foremost, CRA was enacted in 1977 to reverse so-called “redlining” in the 1960s and 1970s—long before subprime mortgages at the heart of the current crisis were ever made—at a time when commercial banks would not extend credit to entire neighborhoods, usually minority neighborhoods. The Community Reinvestment Act imposes a duty on banks that operate under CRA to lend to borrowers in the census tracts in which it takes deposits, including poor neighborhoods.

Second, when CRA was passed in 1977, it was designed to cover only depository institutions—commercial banks and savings-and-loans institutions, or thrifts—that made the lion’s share of home mortgages back then. As subprime lending exploded in this decade, CRA lost its relevance because it doesn’t cover the more loosely regulated non-bank mortgage companies, which increasingly took the mortgage market away from banks and thrifts.

Non-bank mortgage companies, which aren’t covered by CRA, originated an estimated 50 percent of subprime loans in 2005, for example, according to testimony from Center for American Progress Senior Fellow Michael Barr. It is these institutions that mostly started to collapse at the beginning of the crisis. Another 30 percent of loans were made by subsidiaries of banks or thrifts, which are allowed—at their option—to use loans made by these subsidiaries to count toward their CRA rating.

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