Until the Clinton years, CRA compliance wasn’t a difficult matter for banks, which could get an A for effort simply by advertising loan availability in certain newspapers. Then the Clinton Treasury Department changed matters in 1995, requiring banks that wanted “outstanding” CRA ratings to demonstrate statistically that they were lending in poor neighborhoods and to lower-income households. But this new era of strict enforcement came about in response to conditions that no longer existed. The bank deregulation of the 1980s—initiated not by Republicans, but by the Carter administration’s federal Depository Institutions Deregulation and Monetary Control Act—paved the way for sharp competition among mortgage lenders. “The CRA may not be needed in today’s financial environment to ensure all segments of our economy enjoy access to credit,” argued a 1999 Dallas Federal Reserve Bank paper called “Redlining or Red Herring?”
But banks, engaged in a frenzy of mergers and acquisitions, soon learned that outstanding CRA ratings were the coin of the realm for obtaining regulators’ permission for such deals. Further, nonprofit advocacy groups—including the now famous Acorn and the Neighborhood Assistance Corporation of America (NACA)—demanded, successfully, that banks seeking regulatory approvals commit large pools of mortgage money to them, effectively outsourcing the underwriting function to groups that viewed such loans as a matter of social justice rather than due diligence. “Our job is to push the envelope,” Bruce Marks, founder and head of NACA, told me when I visited his Boston office in 2000. He made clear that he would use his delegated lending authority to make loans to households with limited savings, significant debt, and poor credit histories. The sums at his group’s disposal were not trivial: when NationsBank merged with Bank of America, it committed $3 billion to NACA. The housing arm of Acorn received a $760 million commitment from the Bank of New York.
Sizable pools of capital came to be allocated in an entirely new way. Bank examiners began using federal home-loan data—broken down by neighborhood, income, and race—to rate banks on their CRA performance, standing traditional lending on its head. In sharp contrast to the old regulatory emphasis on safety and soundness, regulators now judged banks not on how their loans performed, but on how many loans they made and to whom. As one former vice president of Chicago’s Harris Bank once told me: “You just have to make sure you don’t turn anyone down. If anyone applies for a loan, it’s better for you just to give them the money. A high denial rate is what gets you in trouble.” It’s no surprise, then, that as early as 1999, the Federal Reserve Board found that only 29 percent of loans in bank lending programs established especially for CRA compliance purposes could be classified as profitable.