The Role of the Community Reinvestment Act on the 2007...

The Role of the Community Reinvestment Act on the 2007 Housing Bubble Collapse The reality of the worst financial crisis in the last 80 years has led to wide speculation of its causes. While a plethora of theories have been offered, none have been as persistent and as patently false as the assertion that the Community Reinvestment Act of 1977 played a significant role in the housing bubble collapse. Critics of the Community Investment Act (CRA) argue that by pushing banks to meet the credit needs of low-income borrowers, the law forced lending institutions to take on riskier loans that proved to be fiscally irresponsible. The securitization and speculation of these low quality loans led to the housing bubble collapse and the wider†¦show more content†¦The Act dictated that relevant supervisory agencies ensure depository banks fulfill the credit and lending needs in the areas in which they were chartered. The Act goes on to state that all business must continue to be conducte d within sound operating practices. Compliance (or lack thereof) would be taken into account when approving applications for expansion through new charters, mergers and acquisitions. The law makes no attempt to evaluate the performance of any given institution, nor does it establish minimum criteria for granting an individual or business a loan. The CRA does not mandate that an institution take on any particular types of loans, or approve certain applicants. With the obvious incentives of complying with the CRA, local bankers began to tap into markets that would have been considered prior to CRA enforcement in the late 70’s. These lower-income areas proved fiscally viable, and began to draw the attention of financial institutions other than depository banks. These investment banks were involved in speculative investment and resale of mortgages and were not regulated under the terms of the CRA. Non-CRA covered lending institutions have played an increasingly large role in lending to low-income neighborhoods since the law was enacted. The primary claim of those who believe the CRA played aShow MoreRelatedThe Financial Market Analysis On Fiscal And Fiscal Sector1538 Words   |  7 Pagesto inject money in the economy has helped jump start the economy. The cost of the economies revival was at the expense of banks giving out mortgage loans to individuals with poor credit. With the help of deregulation and historical trends of the hous ing prices, financial analysts felt no harm in giving loans to individuals as long as house prices were rising, the default risk would be zero. 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