1/21/2020

Touching a Liberal Third Rail

"The CRA has become a liberal icon—and a conservative bête noire, cast as a partial accessory to the 2008 financial crisis, on the view that pressuring banks to make loans based on borrowers’ location, rather than on their creditworthiness, leads to poor underwriting practices. Regardless of how one sees the CRA’s history, the Trump administration is right to revise the law; it would be right to repeal it, too, though repeal is unlikely.

The CRA doubtless pushes banks to allocate capital in unconventional ways. For groups like the National Community Reinvestment Coalition, a defender of the law, that’s exactly the point. In their eyes, low-income minority areas are “underserved” by lenders. The New York Times echoes that view. “Banks don’t like lending in lower-income neighborhoods,” its editorial board declared, “even as they profit from deposits taken from those same communities.” Many neighborhoods, the paper continued, are “credit deserts.”

Such declarations ignore how the financial-services industry has transformed since Jimmy Carter signed the CRA into law. At that time, interstate banking was still prohibited; online competition from Quicken Loans, for example, didn’t exist, and nonbank lenders were nowhere on the horizon. It’s true that banks “redlined” select neighborhoods, but that’s because they could do so with impunity, in protected cocoons."