When Congress passed the Community Reinvestment Act (CRA) in 1977, they did so in part to stop banks from engaging in “redlining” – a term used to describe the practice of drawing boundaries (redlines) on maps showing no loan zones where income low and/or troubled credit borrowers lived.
From the point of view of frustrated borrowers (and their advocates in Congress), redlining was nothing more than naked racism that dished out loan refusals from federally chartered banks that advocates say had a “duty” to serve the community where they did business.
From the point of view of banks, “redlined” communities were simply bad credit risk areas based on low credit scores, limited incomes, the inability of prospective borrowers to make down payments and the unlikelihood that borrowers could service the loan over time.
The CRA was employed as a blunt club to force banks to discard credit worthy guidelines, offer no down payment loans and do both without verifying employment, income and debt loads of prospective borrowers.
To keep up with changing circumstances, Congress updated the CRA in 1995 and again in August 2005 – changes that set off the Wild West lending practices that created a housing bubble that burst in 2008 leaving banks and brokerage companies with insolvent portfolios filled with unmarketable mortgages gone bad.
Fast forward to today.
While the hangover from the 2008 housing crash still lingers, foreclosures continue at a steady pace and once well off “on paper” homeowners servicing “underwater” home loans, the federal government is beginning to use the CRA once again to pressure banks into using the loan practices that led to the housing collapse in the first place.
So says the latest semi-annual report of the Consumer Financial Protection Bureau (CFPB).
The CFPB was created by Congress and set up by President Barack Obama late in 2009 as a clearinghouse for complaints on credit card, student loan, payday lending, line of credit and mortgage debt obligations that consumers either cannot or will not pay.
Leading the charge for easing lending terms is Representative Brad Sherman (D., CA) who serves on the House Financial Services Committee. During a January 28 committee hearing, Sherman asked about the impact of fair-lending enforcement pointing out that those with lower credit scores and income were paying more for credit.
Chairman Jeb Hensarling (R-TX) set the majority tone by noting “when it comes to credit cards, auto loans, and mortgages of hardworking taxpayers, the CFPB has unbridled, discretionary power not only to make them less available and more expensive but to absolutely take them away.”
Writing for National Review Online, Eric Grover, a principal of Intrepid Ventures, a consultancy serving the financial services and payments industries said:
“Increasingly Newspeak shrouds credit discussion. Community activists, politicians, and regulators beat tom-toms for “responsible lending” — by which they mean more credit on easier terms for politically favored, less- creditworthy constituencies — and hurl incendiary accusations of racial discrimination at banks.”
The evolving credit picture turns on a concept called the “Disparate Impact Doctrine” that seeks at once to make sure credit decisions are made independent of race while making sure all races receive equal credit decision outcomes.
Describing the Doctrine as “obnoxious”, Grover writes that:
“Insisting that any credit results not mirroring the population’s ethnic mix constitute illegal racial discrimination. Every lender is at risk. Few if any walks of American life exactly mirror the proportion of different ethnic groups in the larger population.”
The disparate-impact doctrine could come under Supreme Court review in a case involving a February, 2013 Housing and Urban Development regulation permitting disparate-impact claims against the American Insurance Association and National Association of Mutual Insurance.
Judge Richard J. Leon of the U.S. District Court for the District of Columbia reopened the case following an unexpected settlement in the Township of Mt. Holly, New Jersey v. Mt. Holly Gardens Citizens in Action.
Mt. Holly would have decided the legality of the disparate–impact doctrine under the equal protection clause of the Constitution – a settlement that came to the great relief of the Obama Administration that doesn’t want the doctrine to undergo constitutional review.