San Francisco Fed Explains Why The CRA Became Much More Dangerous

The Business Insider ^ | 6/26/09

[FromLori]

A mortal blow to the time-gap argument

Earlier this afternoon, I explained at length why the long delay between the 1977 passage of the CRA and the mortgage boom didn't absolve the law from playing a role in loosening mortgage standards. After that post, I came across a 2004 newsletter from the San Francisco Federal Reserve that explains why the CRA became much more dangerous "effective" in the 1990s.

From the newsletter:

While the results in these studies are consistent in some respects with a role for the CRA in narrowing any gap between LMI and other home purchase lending, in one particular respect they call that role into question. If the CRA did help narrow the gap between LMI home purchase lending and other home purchase lending during the 1990s, why didn’t it succeed before the 1990s in effectively eliminating the gap?

Changes related to LMI access to credit

Three changes in the late 1980s and the 1990s may help explain a delay in the CRA’s effectiveness. First, in 1989, the CRA was amended to require public access to CRA examination evaluations and performance ratings. This likely helped motivate banks to comply with the CRA in order to avoid adverse publicity. Second, and perhaps more importantly, in 1995, the CRA evaluation process increased the emphasis on actual lending and decreased the emphasis on banks’ documentation of their efforts to assess community needs. Third, advances in computer and financial technology during the 1990s likely reduced imperfect information problems that may have impeded LMI lending. During this period, credit evaluation techniques and data improved with the increases in computer capacity, computer speed, and accessibility of large stores of financial and demographic information. Once imperfect information problems were sufficiently reduced, LMI lending could grow at a relatively quick pace.

[misterrob]

CRA played a role but the larger issue was the fraud and the willingness of banks and other non-bank entities to write mortgages, offer Alt-A deals and accept/encourage bad appraisals for property. WTF would any bank write paper for a $500K POS in Compton for crying out loud?

[D-fendr]

If anyone can translate this, I’d appreciate it.

[expatpat]

During this period, credit evaluation techniques and data improved with the increases in computer capacity, computer speed, and accessibility of large stores of financial and demographic information.

That part sounds like BS to me. There was no problem getting credit reports before then.