- What about the elimination of payment history?
How about income requirements?
instructed banks to consider alternatives to traditional
credit histories because CRA targeted borrowers often
lacked traditional credit histories. The banks were
expected to become creative, to consider other indicators
Similarly, banks were expected by regulators to relax
income requirements. Day labors and others often
lack reportable income. Stated-income was a way of
resolving the gap between actual income of borrowers and
reported income. The problem, of course, comes when the
con-artists and liars come into the game.
- Did the CRA require banks to develop automated
underwriting systems that emphasized speed rather than
accuracy in order to process the greatest number of
mortgage apps as quickly as possible?
This was another lending innovation praised by regulators
to the point that it became mandatory for banks. Those who
were not employing automated underwriting would
be putting their CRA ratings at risk. Automated
underwriting was seen as a way of eliminating bias in
- Point out to me where in the CRA or any
regulation that any of this is required.
I cannot. But this kind of legislative fundamentalism
misconstrues the way laws constrain business activity. An
unenforced law exercises little constraint, regardless of
how onerous it is worded. Think of the way anti-trust
enforcement changes from presidential administration to
In the case of the CRA, it was the activity of the
regulators that matters. And each of these credit
innovations described above was put into place to satisfy
the CRA regulators.
- Wouldn’t lending standards have been lax
during the boom even if we didn’t have a CRA?
That’s an interesting question to which we’ll never have
a satisfactory answer. It’s possible. But this kind of
counter-factual is just a game. We know that we had the
CRA and that it caused relaxed lending standards in the
reality we actually live. In another universe, another
reality? Well, if you get there send us a post-card and
let us know how it turns out.
- Couldn’t the increase in CRA loans have been
accomplished without these lax lending standards?
This is another interesting question about an alternate
universe. It is possible that banks may have been able to
meet their CRA obligations with tighter, more traditional
lending standards. But we’ll never know. We know that they
thought they needed to employ lax standards, and so did
the regulators. A banker who refused to relax standards
risked the wrath of regulators, and—more importantly—if
his unorthodox, novel attempts failed he’d be found to be
in non-compliance with the CRA. In the real world, lax
lending standards were the only known way of satisfying
the CRA regulators.