April 27, 2009
Ray Brescia on The Community Reinvestment Act and The Financial Crisis
Ray Brescia has posted "Part of the Disease or Part of the Cure: The Financial Crisis and the Community Reinvestment Act," 60 S. Car. L. Rev. 617 (2009) to SSRN. The abstract is below:
In the thirty years since the CRA’s adoption, the banking industry has been transformed. Banks are global in their reach and their outlook. Banks, in all of their forms, are no longer brick-and-mortar institutions on Main Street that take deposits from the grocer and lend to the baker. The CRA, which Congress designed to ensure that banks would meet the credit needs of the low- and moderate-income communities from which those banks take their deposits proved a weak bulwark against the subprime mortgage crisis; unsafe and unsound lending practices carried out by mortgage companies (i.e., entities not covered by the CRA because they are not depository institutions) have decimated the same communities that the CRA was supposed to protect.
The argument that the CRA is to blame for the financial crisis is hard to reconcile under any reading of the statute’s terms and after any assessment of the CRA’s true reach. As this article explains, the CRA was not too strong, but rather too weak. Designed to fight the last war, the CRA became the financial equivalent of the Maginot Line: easily circumvented, lightly defended, and quickly overrun.
An appreciation for the true causes of the financial crisis, together with the fact that the federal government has expended billions to bail out the financial industry, offer strong justifications for expanding the reach of the CRA to cover all financial institutions, not just those that take deposits. This Article begins with a brief overview of the subprime mortgage crisis and its impacts. Following this overview, it outlines the legislative history and structure of the CRA as well as the enforcement mechanisms Congress adopted to carry out the CRA’s core purpose. Next is an assessment of whether the manner in which the Act was enforced may have contributed to the subprime mortgage crisis followed by an examination of the failure of the courts to serve as a check on weak regulatory enforcement of the CRA. It concludes with the development of a series of principles to inform efforts to modernize the CRA to bring it in line with the nature of banking in the twenty-first century. While such CRA modernization might not correct the worst abuses of the subprime mortgage market from the past, it might help to avoid similar crises in the future.
-Considering how common these CRA accusations are in the press, definitely a valuable contribution. E.R. email@example.com
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