Wednesday, May 03, 2017

Myth: The Community Reinvestment Act forced banks to make bad loans

In recent days, I've been participating in an interesting debate in the Fox News Politics community of Google+. You can find it here. It started out as a debate over trickle down politics, but after a day or two, turned into a debate on the collapse of the housing bubble.

First, let me show you the meme that I shared in that community:

It's an interesting meme and point of departure for discussion. None of the tax cuts we've seen since Reagan was president have ever closed the federal budget deficit. Yet the pretense is that if you cut taxes, businesses will flower and blossom that will employ more workers in a virtuous circle. During the Bush Administration, tax rates were at a historical low yet, near the end of the 2nd Bush term as president, our nation was plunged into the Great Recession.

What I find interesting is not how the debate turned to the Community Reinvestment Act (CRA) as the cause of the Great Recession. What I find interesting is that many conservatives hold a sincere belief that the CRA forced banks to make bad loans. It's like an urban myth, literally, but it's a conservative myth.

I recall the collapse of the housing bubble in 2008 very well. I was working a new job as "the IT guy" at a debt collection shop. I enjoyed working there because I saw the other side of debt collection, having at one point in my life, been the person of interest with debt collectors. Working there gave me a window into how at least one loan collector runs his business.

Every Monday, the owner (who shall remain nameless for this article) would hold a meeting in the lunch room to educate his employees about the law. During his meetings, he would discuss both federal and state laws concerning debt collection. He was quite enthusiastic when he talked about the laws, but he really shined when he talked about the federal Fair Debt Collection Practices Act. The Act has been modified since then, but I can recall with clarity, how he discussed the first few sections of the Act, as codified at Title 15, United States Code, section 1692, in shorthand, 15 USC 1692.

He seemed to glow as he discussed the Congressional findings and purpose, the intent of Congress. He explained, with some glee, that "no debt collector shall be disadvantaged from following the spirit and the letter of the law". He understood that the law was intended to curb or eliminate abuses in debt collection practices and he emphasized that point to a room full of debt collectors every Monday. He said, "Your job, as debt collectors is to follow the law."

What he showed me is that the preamble to the act, as codified, demonstrates Congressional intent.

So, during the debate on the subject of the CRA at Fox News Politics, I researched the CRA. It is codified at 12 USC 2901, et. seq. As with the Fair Debt Collection Practices Act, Congress saw fit in 1977, to state their intent concerning this law:
§2901. Congressional findings and statement of purpose
  (a) The Congress finds that—
       (1) regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business;
       (2) the convenience and needs of communities include the need for credit services as well as deposit services; and
       (3) regulated financial institutions have continuing and affirmative obligation to help meet the credit needs of the local communities in which they are chartered.
  (b) It is the purpose of this chapter to require each appropriate Federal financial supervisory agency to use its authority when examining financial institutions, to encourage such institutions to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions. (emphasis mine)
The CRA grants authority to agencies responsible for implementing this law, to encourage lending institutions to make loans that are safe and sound. There is nothing in that law about "liars loans" or directing banks to make loans without checking for income or the ability of the borrower to pay back the loan.

Conservatives cry foul and claim that banks were forced to make bad loans, but they conveniently ignore the preamble of the CRA which states the intent of the law. That means that everything that follows within that chapter of law must conform to the intent of Congress - the law must be taken in context. Agencies charged with executing the laws are not free to exceed the authority granted to them. If Congress says that agencies must encourage lending institutions to make loans that are consistent with the safe and sound operation of the institution, then agencies must do that. If they did not, any bank could sue for relief from such a rogue agency.

Did any banks sue over the CRA? Did any banks ever cry foul over a law that purports to make them sell bad loans? Not that I'm aware of. But the banks had no problem selling expensive loans to minorities, even when they could have qualified for better terms. Just ask the city of Miami, Florida, where they're still cleaning up the mess from all the bad loans that were made. That city sued Bank of America and Wells Fargo over the costs of cleaning the blight left from abandoned homes left by people who could not pay back their loans with bad terms. Those people were sold loans at higher interest rates based on the color of their skin, not their credit scores or history.

Conservatives in their defense of the banks will blindly ignore the fact that four men were acquitted over loan fraud because executives at the lending institution did not check for income for years before the collapse of the housing bubble. I mentioned this in said debate above, and Salon has that story here. Here are some highlights:
  • Four men charged with loan fraud used a novel defense: the bank never checked for income and made "stated income" or "liars loans", so if the bank knew that information on the loan application could be false and just wanted to make the loan, how could they have committed fraud on the bank?
  • Bill Black, a professor of economics and law at the University of Missouri-Kansas City and also a Distinguished Scholar in Residence for Financial Regulation at the University of Minnesota’s School of Law, says that bank executives knew what they were doing and committed "accounting control fraud". Bank executives were allowing risky loans while earning bonuses from the sales of the loans.
  • The Federal agent who had investigated the case—a man with plenty of experience detecting mortgage fraud—told the court that he had not talked to executives at the firms in question and, indeed, had not interviewed any top mortgage executives, ever. As if the bank had no responsibility at all.
  • The bank CEO never appeared at the trial. He wasn't even subpoenaed.
Conservatives (even neoliberal Democrats like Barack Obama) will tell you that the banks were the victims. But given what we learned in this trial and acquittal of 4 men, banks knew very well what they were doing. When Bank of America bought Countrywide, do you think they performed due diligence? I think they did, and they knew about all the bad loans that Countrywide was holding, expected a bailout, and they got one. All of the big banks knew what was going on.

The same people who defended the banks as victims of government regulation are also willing to overlook one simple fact: banks who can wrangle an $800 billion bailout at their darkest hour are most certainly not powerless to stop a bad law. Banks have the money and the influence to get the laws they want. They act as if we live in an oligarchy. They could have stopped or amended the CRA to their liking in Congress, but they did not. They could have amended the CRA with a more sympathetic Congress later. They did not.

The debate at Fox News Politics then turned to vagueness, that there is too much vagueness in the law to fight it. Well, there's a legal doctrine for that. "Void for vagueness" from the Legal Information Institute:
Under vagueness doctrine, a statute is also void for vagueness if a legislature's delegation of authority to judges and/or administrators is so extensive that it would lead to arbitrary prosecutions.

An enterprising law firm hired by the banks could have made that argument to stop a law they believe is bad. But they did not.

Banks do not have clean hands in the meltdown. Not only did they participate in an orgy of bad finance practice, they contributed to the stagnation of wages that made it difficult if not impossible for borrowers to pay back their loans. Banks used their money to influence the public policy decisions that decoupled productivity from wages and have been doing so since the 1970s.

Since the 1970s, CEO salaries (including bank CEOs) have grown more than 900% while wages have grown a mere 30%. This is a result of a long line of public policy decisions that distributed income upwards. These public policy decisions didn't just decoupled wages from productivity. They decoupled CEO salary from productivity as well, but at the expense of the working class.

The rise of CEO salary relative to wages cannot be explained by mere economics. A far more plausible explanation is that extreme inequality is a public policy choice, not economics. Economist Dean Baker has that story in plenty of detail in his book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer (it's free, too).

Not only did the big banks cry foul when they stood to lose billions, they created the situation to begin with. They could have acted proactively to prevent the housing bubble and its collapse, but did not, and they had no problem leaving the taxpayer with the bill.
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