How The Government Used The CRA To Push Crappy Lending Standards

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If you still doubt the role of the Community Reinvestment Act in encouraging lax lending practices, you should check out this 1996 pamphlet published by the Comptroller of the Currency. It discusses “some activities undertaken by small national banks that demonstrate exemplary performance under the Community Reinvestment Act.” Those activities now look a lot like the creation of toxic loans.

And what are those activities?

  • Hawley National Bank is praised for offering residential loans with flexible terms, including three-year and five-year balloons and adjustable-rate mortgages. It also offers down-payment assistance.
  • First National Bank of the Berkshires’ loan portfolio, which consisted mostly of real estate related loans, is said to “reflect positively” on the bank’s efforts to meet CRA requirements. “The bank’s most innovative product is a mortgage loan, offered to customers of all income levels, that requires only a 3 per cent down payment. In addition, the bank pays most of the closing costs and will escrow those to be paid by the borrowers. According to the bank officer, this product has received tremendous interest and represents about 80 per cent of new loan originations,” the pamphlet says.

These examples are offered as “helpful hints” to other banks on how to comply with the CRA.

 

 

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