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The notion that the CRA fueled the subprime bubble is a "misperception promulgated by many who either do not know much about the law or don't like it," Federal Reserve Board Governor Elizabeth Duke said in February, when the agency issued a report debunking the conspiracy theory. CRA was established in 1977 to prevent federally insured commercial banks and other retail depository institutions from discriminating against entire neighborhoods, a practice called "redlining." However, the law doesn't explicitly order banks to change lending standards. Additionally, if a bank chooses to operate no branches in the inner city, then in theory they are not obligated to lend there either. "Let me ask you, where in the CRA does it say to make loans to people who can't afford to repay? Nowhere." FDIC Chairman Sheila Bair said in December. Republicans particularly have argued that CRA fueled the housing bubble by encouraging banks to offer low-doc, teaser rate financing to people who otherwise would not qualify for mortgages because of poor credit histories or inability to keep up with their payments. Bair's response to such assertions: "the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth ... pure and simple." The Fed study, meanwhile, found nearly 60% of higher-priced loans went to middle- or higher-income borrowers or neighborhoods outside of the scope of CRA lending. The Fed's results make sense when you consider where most of the country's foreclosures are taking place, the suburbs of California, Florida, Arizona and Las Vegas -- not the inner city, which is the subject of CRA guidelines. Additionally, the 20% of subprime loans that did go low- or moderate-income areas or borrowers were originated by nonbank lenders not covered by CRA obligations. These facts all seem to be lost on Carney and other CRA conspiracy theorists. Instead, Carney argues three points:
What's also lost is the fact that CRA was on the books for 30 years before the bubble blew up. Given the law's long history including brief efforts by the Clinton administration to add teeth to it, why didn't a bubble occur much sooner? Probably because the problems in the housing market correlate better with the growth of securitization. In fact, the housing bubble was not simply unique to the U.S. market, but also prevalent in the U.K., which also had a vibrant securities market for mortgages too, but no CRA. For additional analysis, see Felix Salmon's response or Barry Ritholtz's Big Picture item from October or better yet his book "Bailout Nation." - Matthew Wurtzel See Carney's story from Clusterstock
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Clusterstock's John Carney once again 
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Thanks for the kind words -- please note the new URL to the blog is : http://www.ritholtz.com/blog/