South Carolina Law Review Volume 60 Issue 3 Article 4 Spring 2009 Part of the Disease or Part of the Cure: The Financial Crisis and the Community Reinvestment Act Raymond H. Brescia Albany Law School Follow this and additional works at: https://scholarcommons.sc.edu/sclr Part of the Law Commons Recommended Citation Raymond H. Brescia, Part of the Disease or Part of the Cure: The Financial Crisis and the Community Reinvestment Act, 60 S. C. L. Rev. 617 (2009). This Symposium Paper is brought to you by the Law Reviews and Journals at Scholar Commons. It has been accepted for inclusion in South Carolina Law Review by an authorized editor of Scholar Commons. For more information, please contact [email protected]. Brescia: Part of the Disease or Part of the Cure: The Financial Crisis and PART OF TIE DISEASE OR PART OF TIE CURE: THE FINANCIAL CRISIS AND TIE COMMUNITY REINVESTMENT ACT RAYMOND H. BRESCIA* I. IN TRO D UCTIO N .......................................................................................... 6 18 II. THE SUBPRIME MORTGAGE MELTDOWN .................................................. 620 III. THE CRA: HISTORY, PURPOSE, AND IMPACT ............................................ 627 IV. THE CRA AND SUBPRIME LENDING: REGULATIONS, REGULATORS, AND THE COURTS ...................................... 642 A . The Scope of the CRA ......................................................................... 642 B. Efforts to Change the Regulations and Broaden the CRA 's Scop e ..................................................................................................64 5 1. Covering Bank Affiliates ............................................................. 646 2. Covering Lending Outside a Bank's CRA Assessment Area ....... 647 C. FederalRegulators, State "Sheriffs, " and PredatoryLending .......... 648 D. The Lack of CRA Oversight ............................................................... 652 V . JUDICIAL REVIEW OF THE CRA ................................................................. 653 VI. A CRA FOR THE 21 ST CENTURY ............................................................... 661 A. Broadeningthe CRA 's Reach ............................................................. 661 B. Perm itting State Enforcement ............................................................ 663 C. JudicialReview and Performance-BasedStandards ........................ 664 V II. C O N C LU SIO N ............................................................................................. 675 * Visiting Assistant Professor, Albany Law School; J.D., Yale Law School (1992); formerly the Associate Director of the Urban Justice Center in New York City, a Skadden Fellow at The Legal Aid Society of New York, law clerk to the Honorable Constance Baker Motley, and staff attorney at New Haven Legal Assistance Association. I must acknowledge the contributions to this piece by my research assistants, lrina Yegutkin, Mary Holst, Matthew LaRoche, and Robert Magee, and my legal assistant, Fredd Brewer. Elizabeth A. Renuart provided helpful suggestions after reviewing earlier drafts, for which I am grateful. I am also grateful for the contributions to this piece by Richard D. Marsico, a tireless CRA advocate and scholar, who just happens to be my brother-in-law. Published by Scholar Commons, 2020 1 South Carolina Law Review, Vol. 60, Iss. 3 [2020], Art. 4 SOUTH CAROLINA LAW REVIEW [VOL. 60: 617 I. INTRODUCTION The Community Reinvestment Act of 19771 (CRA) has been called many things. For some, it represents a lifeline, as community reinvestment advocates, working in conjunction with banks, have generated trillions of dollars in desperately needed capital investment in communities that historically have been excluded from mainstream banking and community development activities. For others, it is a burden, reflecting misguided judgments about the proper role of regulatory oversight in capital allocation. Still others believe it is an abomination, one that spurred the mortgage crisis and the financial fallout that has followed. Born out of the Civil Rights Movement, Congress adopted the CRA at a time when many low- and moderate-income communities, often communities of color, were denied basic banking services such as home lending and small business investment. Advocates argued that when the federal government guaranteed bank deposits through federal deposit insurance, it created a social compact. That compact served as a justification for expecting that institutions accepting such insurance should have to meet the needs of the communities making those deposits. Federal deposit insurance made bank customers confident in their bank's holdings, which in turn made the business of banking-lending-possible and became a justification for the adoption of the CRA. 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. Instead, they manage investments from Dubai and China and use those funds to build roads in North Africa, set up cell phone service in Argentina, and construct oil rigs in Siberia. And the CRA, which Congress designed to ensure that banks would meet the credit needs of the low- and moderate-income communities-the communities of the grocer and the baker-proved a weak bulwark against the subprime mortgage crisis; unsafe and unsound lending practices have decimated the same communities that the CRA was supposed to protect. These practices promise to set many communities back decades economically and socially, leaving a wake of foreclosed homes-a true nightmare on Elm Street, and Maple Street, and Pine Street. As the subprime mortgage meltdown has spurred the wider financial crisis, some commentators have blamed the CRA, passed in 1977, for the events that began to unfold twenty-five years later. According to the theory, the CRA 1. 12 U.S.C. §§ 2901-2907 (2006). https://scholarcommons.sc.edu/sclr/vol60/iss3/4 2 Brescia: Part of the Disease or Part of the Cure: The Financial Crisis and 2009] COMMUNITY REINVESTMENT ACT forced banks to engage in risky loans to risky borrowers in risky neighborhoods-predominantly in low-income and minority communities. If it were not for this decades-old law and aggressive efforts by community advocates promoting compliance with it, commentators posit that events in the earlier part of this decade, where questionable loans were extended on unfavorable terms to borrowers that could not afford them, might have turned out differently. Were it not for this law and the power of community-based groups that championed it, the argument goes, long-standing underwriting principles would not have given way to exotic loans made to borrowers who had no business owning a home. While this theory might offer cold comfort to those who believe that banks, left to their own devices, will act with prudence, the theory cannot stand up to any sober assessment of the subprime mortgage meltdown and the financial crisis that has followed. In fact, this argument is hard to reconcile under any reading of the statute's terms and after any assessment of the CRA's true reach. In this Article, while I address the question of whether the CRA is to blame for the subprime mortgage crisis because it somehow forced banks to engage in risky behavior, I also take a slightly different tack. Although I explain why these critics are wrong about their assessment of the CRA's role in the subprime mortgage crisis, I recognize that the CRA has limitations. Several facts expose the true role of the CRA in the subprime mortgage crisis, however. For example, the CRA was not too strong, but rather too weak. The CRA's limitations gave banks and their regulators broad discretion to carry out the CRA's goals. This fact, coupled with the approach of federal bank regulators towards subprime lending generally and the failure of the courts to serve as a check on administrative neglect under the CRA, meant that instead of causing the subprime mortgage crisis, the CRA simply failed to prevent the crisis. The CRA was not strong enough, and it allowed banks and regulators free rein to ignore the central premise of the Act: that banks must meet the needs of the communities they serve consistent with safe and sound banking practices. It is within this phrase, the key statutory directive under the CRA-"to encourage [banks] to help meet the credit needs of the local communities... consistent with the safe and sound" banking practices, 2 which is the articulated letter and spirit of the law-that we recognize the seeds of the subprime debacle that has swept the globe. First, at the height of the housing bubble that saw the explosive growth of subprime lending, banks covered by the CRA rarely made subprime loans in such a way that would give them CRA credit; instead, in the overwhelming majority of cases, institutions not covered by the CRA issued the subprime loans. Second, the geographic location of the "communities" 3 the 2. Id. § 2901(b). 3. Id. Published by Scholar Commons, 2020 3 South Carolina Law Review, Vol. 60, Iss. 3 [2020], Art. 4 SOUTH CAROLINA LAW REVIEW [VOL. 60: 617 banks served could easily be manipulated, so when traditional banks did engage in subprime lending, it was typically outside of the communities they served for the purposes of the CRA. Third, risky lending all too often carried out in low- and moderate-income communities