Tuesday, December 06, 2011

It's not the law; IT'S THE REGULATORS

John Carney on the realities of the Community Reinvestment Act:
To believe anything that Hollander claims you have to be a statutory fundamentalist, someone who believes all that matters is what the law says. To put it slightly differently, you have to believe the actual operation of the law and the activities of regulators it empowers are irrelevant.

There are plenty of these people. Former FDIC chair Sheila Bair is one of them. She once asked, “Where in the CRA does it say make loans to people who can’t afford to repay? Nowhere!"

This is like arguing that no person could ever have been wrongly imprisoned because the law says only the guilty should go to jail.

"Where in the criminal code does it say the innocent can be imprisoned? Nowhere!"

The truth is regulators took the view that banks should drop every traditional lending standard to comply with the CRA. The regulators wanted down payments to come down or be eliminated altogether. They told banks not to use credit histories anymore, to relax income requirements, to develop automated underwriting programs that took human judgment out of mortgage lending.

A 1999 study by the Treasury Department concluded the CRA was influencing the lending practices of institutions that weren't covered by the law.
Hollander, like so many who have come before him, want all of this to just vanish down the memory hole. It's a convenient story for people who desperately want to trust that benign regulators will prevent another financial crisis. It's a far scarier world when you realize that regulators were in on the mess from the start.
Image link here.

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