ACORN and the Community Reinvestment Act

I wrote a post a few weeks ago about the role that the Community Reinvestment Act played (or, rather, did not play) in causing the current global financial meltdown. I was planning to get out of the issue there, but a really nice article by Devilstower over at Daily Kos sucked me back in. During the time when I wasn't paying any attention to the issue, the right wing noise machine added a new villain to their attempts to blame Wall Street's mess on the left: ACORN.

In 1977 Democratic President Jimmy Carter passed the Community Reinvestment Act to provide housing to poor people. In the 1990s Bill Clinton had Attorney General Janet Reno threaten banks under red lining rules into giving loans to people who could not afford them. Then in the last 8 years, the leftist group ACORN, which has ties to Barack Obama, went to banks and threatened them to relax their rules again. Banks had to give loans to people who had no jobs or no identification.

Devilstower followed up on this with a must-read explanation of what the now-infamous credit default swaps actually are, and why they - and not the CRA - are responsible for the current mess. Along the way, he discussed what the CRA actually entails, what the Clinton-era changes to CRA regulations did, and what the default rates were on mortgages during the early part of this decade. I couldn't help but notice, though, that there was an element missing from his post: the ACORN involvement.

I picked up on the omission because I'd read an article by Eileen Markey on just that topic a couple of weeks ago. In that article, Markey noted that ACORN had actually conducted protests at various banks in an effort to get them to reign in their more predatory subprime lending habits. I resisted the urge to blog the article at the time (and resisted it again when my mother emailed me a link to the same article a week or so later), but after reading Devilstower's post I went back and took another look at it.

The concept of ACORN as a group that tried to head off the current catastrophe is certainly not something that fits in well with the picture that the noise machine is trying to paint. It wouldn't be the first time that the right has promoted an alternate reality, of course, but I figured that it wouldn't do any harm if I did a little fact checking on the Markey piece before blogging it. As it turns out, I was wrong. The "harmless" fact checking cost me some time, and left me much, much angrier at both the loan industry and at the current Administration than I was before.

The quick fact check on the (well-written and accurate) City Limits article quickly turned into a massive, multi-hour geek-out. Looking at ACORN's role lead me to learn more about how the big banks actually pushed people into riskier loans when alternatives were available, about how a little-known federal agency eviscerated state-level attempts to oversee the banks, and about the futile attempts that a number of the very people the right is attempting to vilify made to warn people about the danger posed by predatory subprime lending.

Here's some of what Markey had to say about ACORN's efforts:

In fact - according to a string of 1999 and 2000 reports in American Banker, a 173-year-old publication calling itself "the leading information resource serving the banking and financial services community" - ACORN was an outspoken, consistent advocate for exactly the kinds of regulations that experts across the political spectrum now agree could have prevented the global economic crisis.

On August 4, 2000, American Banker reported on ACORN protests at nationwide offices of Lehman Brothers - the investment bank that went bankrupt last month because of its investment in over-valued mortgage-backed securities:

"Acorn members said they want Lehman and other investment banks to sign a code of ethics, pledging to adhere to 'best practices' in the mortgage lending business. Though the banks are not lenders, the group argues that they provide capital and financial support to abusive lenders by buying and securitizing their loans.

That's right. Eight years ago, ACORN was protesting at Lehman Brothers. They weren't protesting because Lehman Brothers wasn't giving away enough money in low income areas - Lehman Brothers made no direct loans at all at that time. They were protesting because Lehman Brothers was buying up subprime loans and bundling them into the now-infamous mortgage-backed securities. Lehman's demand for subprime loans was providing an incentive for more lenders to make more crappy loans in low income areas - essentially loading those areas under unsustainable debt.

Let me say that one more time, just so we're clear: the demand for more subprime loans did not come from low-income borrowers or ACORN. It came from investment houses like Lehman - firms that did not originate loans, and had absolutely no obligations under CRA whatsoever.

The obvious question here, of course, is this: why would ACORN protest against something that was providing easier credit in low-income areas?

The answer is remarkably simple: the organizers at ACORN are not idiots.

In order to survive, low income areas need access to affordable credit. Many of the loans that Lehman and the other investment firms were buying up (and trading credit default swaps on) were in no way, shape, or form affordable. They were designed to make as much money for the lenders as possible, with little to no attention given to the needs and capabilities of the borrowers.

Unaffordable loans lead to defaults. Defaults lead to foreclosures. Foreclosures frequently result in vacant houses, which depresses home values in already poor areas even more, resulting in poor people who weren't involved in bad mortgages losing some of their home equity. Which places more financial stress on them. When cycles like that go on for too long, you wind up right back in Fort Apache, The Bronx.

ACORN argued that large numbers of subprime loans were essentially predatory, and fought for regulations that would curtail the worst of those loans. Anyone want to guess what the lenders were arguing?

Here's a gem of a quote from a paywall-protected 23 June 2000 article in American Banker:

For example, Mr. Mozilo said, some aspects of an anti-predatory-lending law passed in North Carolina last year harm the very people such laws are supposed to help.

The law limits the number of points a lender can charge the borrower, he said, and if the lender has a subsidiary that provides ancillary services like credit reports or appraisals, fees for these services are counted toward the limit.

The Mr. Mozillo quoted above is, of course, none other than Mr. Angelo Mozilo of Countrywide lending. That's the same Countrywide that collapsed earlier this year, under the weight of people defaulting on the subprime products that Countrywide had sold them, in many cases unethically:

"In terms of being unresponsive to what was happening, to sticking it out the longest, and continuing to justify the garbage they were selling, Countrywide was the worst lender," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "And anytime states tried to pass responsible lending laws, Countrywide was fighting it tooth and nail."


The company's incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan's value, versus 0.20 percent on loans one step up the quality ladder, known as Alternate-A, former brokers said. For years, a software system in Countrywide's subprime unit that sales representatives used to calculate the loan type that a borrower qualified for did not allow the input of a borrower's cash reserves, a former employee said.

A borrower who has more assets poses less risk to a lender, and will typically get a better rate on a loan as a result. But, this sales representative said, Countrywide's software prevented the input of cash reserves so borrowers would have to be pitched on pricier loans. It was not until last September that the company changed this practice, as part of what was called in an internal memo the "Do the Right Thing" campaign.

Countrywide might not have done so well, and some of their customers might have gotten royally screwed along the way, but don't worry about Angelo. He's cashed out more than $400 million in stock over the years.

Countrywide wasn't the only one steering people into subprime loans even when they could qualify for prime loans. From a 1999 article in American Banker:

Responding to questions about the protests, a Citigroup spokeswoman said the company "has a wide range of flexible products and services available for customers at all income levels in many communities across the country. We're always looking at innovative ways to reach out to consumers and provide them with financial service products that meet their needs."

But Citigroup's detractors said the disparity in the units' lending practices suggests that the mantra of cross-selling is not being pursued at all levels. While Citibank sends loan applicants who are rejected because of bad credit to CitiFinancial, borrowers with good credit who come to one of those units are not "referred up," the critics say.

"It's simply a one-way street, and those traveling on that street are disproportionately minorities," said Matthew Lee, executive director of Inner City Press/Community on the Move, another activist group. Mr. Lee said he supports Acorn's new campaign.

Basically, if you were Joe Blow borrower, with poor credit, and you walked into Citibank, they'd tell you that you didn't qualify for a loan. Then they'd tell you that there was somewhere else you might qualify, and send you on to CitiFinancial. But if you were a borrower with good credit and walked into CitiFinancial, you'd probably be told that you qualified for the best loan that CitiFinancial offered. What you wouldn't be told is that you also would probably qualify for an even better loan at Citibank.

You might be tempted to shrug this off as nothing more than a case where the buyer needs to beware, and laugh off the ignorance of the folks CitiFinancial screwed over. But before you do, stop and think for a second about what this really means. The more expensive a loan is for the borrower, the riskier it's going to be. This policy means that Citi, as a whole, was doing more than merely shafting their customers. They were voluntarily assuming more risk than they actually needed to, by pushing borrowers into costlier CitiFinancial loans when they could have been easily steered, without any lowering of underwriting standards whatsoever, to Citibank's products.

By now, you might be wondering where the regulators were during all of this. Which brings us to what might be the most amazingly aggravating part of this whole story. (Yes, it really does get worse.)

Between 1999 and 2003, a number of states passed legislation in efforts to curb a number of the more predatory lending practices that the banks and mortgage companies were engaging in. This effort ended after 2003, because a little-known branch of the Federal Government used a little-known Civil-War-era law to curtail the state efforts.

In late 2003, the Office of the Comptroller of the Currency (OCC) announced that it intended to use powers granted to it by the National Banking Act of 1863 to preempt state oversight. They finalized this rule in January, 2004. The OCC undertook this action in the face of opposition from all 50 state Attorneys General. The OCC justified preempting the states by arguing that the preemption would reduce the burdens faced by banks - the same anti-regulation argument that we've seen time and time again over the last 8 years:

"When national banks are unable to operate under uniform, consistent and predictable standards, their business suffers and so does the safety and soundness of the national banking system," said Comptroller of the Currency John D. Hawke, Jr. "The application of multiple and often unpredictable state laws interferes with their ability to plan and manage their business, as well as their ability to serve the people, the communities and the economy of the United States."

Mr. Hawke noted that national banks operate in an environment characterized by rapidly-evolving technology, a highly mobile customer base and credit markets that are national, if not international in scope. In that environment, the proliferation of state and local laws leads to higher costs that banks must either absorb themselves, pass on to their customers, or avoid by dropping products and reducing the availability of credit.

While states are free to pass laws governing the operation of the institutions they supervise and regulate, customers of national banks will continue to benefit from an array of consumer protections available through federal law, OCC regulations and the rigorous supervision of national banks and their subsidiaries by the OCC, the Comptroller added.

In the area of predatory lending, national bank customers would be protected by the comprehensive standard included in today's rulemaking. The standard, which applies to all consumer lending activities, codifies the OCC's pioneering approach to combating unfair and deceptive practices and bars loans that rely upon the foreclosure value of the collateral for repayment, a restriction that will prevent lenders from extending credit with an eye toward seizing a borrower's home.

The standard that the OCC released on predatory lending - 70 F.R. 6329 - is predictably laughable. Let's start with the fact that the standard was released in the form of "guideline", rather than as a "regulation." The difference between the two is explained in the introduction to the "guideline" itself:

Section 39 prescribes different consequences depending on whether the standards it authorizes are issued by regulation or guidelines. Pursuant to Section 39, if a national bank fails to meet a standard prescribed by regulation, the OCC must require it to submit a plan specifying the steps it will take to comply with the standard. If a national bank fails to meet a standard prescribed by guideline, the OCC has the discretion to decide whether to require the submission of such a plan. Issuing these residential mortgage lending practices standards by guideline rather than regulation provides the OCC with the flexibility to pursue the course of action that is most appropriate...

(emphasis in original)

In short, the OCC eviscerated the efforts that the states were making to get banks to reform their lending practices. They replaced these efforts - many of which were backed by actual laws with actual penalties - with a "guideline" that was beyond toothless. With one regulation, we went from class-action lawsuits filed by state AGs to a "guideline" that had no actual penalties, and lets the OCC decide whether or not a bank that violates predatory lending guidelines even needs to submit a written plan detailing the steps they will take to stop breaking the "guideline."

As we all know, the phrases "under the Bush Administration" and "effective Federal oversight" can only be used in the same sentence if the word "no" is included. The OCC's takeover of predatory lending prevention is no different.

I went to the "enforcement" section of their website, and took a look at what the agency has done since they took control away from the states. According to the search results, the OCC has taken a total of 383 "enforcement actions" since January, 2004. Only 58 of those 383 actions involved the banks paying fines (that's an average of just under one per month). No more than four of those fines could have possibly involved predatory lending practices. Thirty nine of the cases involved banks failing to require flood insurance, eight involved money laundering, and most of the rest involved record-keeping violations. There was also one rather spectacular case where a bank paid a total of 16.9 million after getting caught improperly getting HUD to take on their risk by falsifying applications.

The four cases that could involve predatory lending involve two cases where the banks were cited for violating fair lending laws, and two cases where I was unable to determine the reason for the violation, and am giving the government the benefit of the doubt. The banks involved in these four cases paid a total of $57,500 to the OCC to settle these problems. Yes, that figure is in whole dollars, not millions, and yes, that's the combined total.

The OCC publishes annual reports on underwriting standards. In 2003, they reported that the standards for retail underwriting remained "unchanged". In 2004, they reported that the standards "reflected more easing and less tightening". In 2005, they noted "increased easing with easing centered in real estate secured products". In 2006, they reported that demand "from nonbank investors has influenced underwriting terms". In 2007, they saw that "standards eased for a fourth consecutive year". It's entirely possible, of course, that the relationship between the easing of underwriting standards was entirely unrelated to the "easing" of oversight. But I wouldn't personally bet a lot of money on that.

At the end of the day, I'm left looking at this sequence of events:

Banks started making bad loans - not just subprime, but predatory - as a result of demand caused by investment banks that purchased and bundled the loans. Groups, including ACORN, protested, in an effort to bring the practices to a halt. Partly in response to prompting from these groups, several states passed laws in an effort to crack down on predatory lending. Banks and lenders fought against these efforts every step of the way. When they failed to stop the legislation, the Federal Government stepped in to protect the banks from the states. The Federal Government replaced the state efforts with guidelines that are so toothless that they make a jellyfish look like a shark. The banks reduced their underwriting standards even more. Chaos predictably ensued. And the right is trying to blame ACORN for the chaos.

Is it any wonder that I ended the day a lot more pissed off than I started it?


A big tip of the hat for this article goes to the West Bronx Blog's Gregory Lobo Jost, who linked the City Limits article I used as a jumping-off point in one of two posts he wrote on the CRA back in the last week of October. If you're interested in learning more about some of the unethical banking practices that sparked the passage of the CRA, you might want to take a look at the earlier of his posts.

14 responses so far

  • Despite some groups accusing us of redlining certain areas of Prince Georges County in Maryland, Wells Fargo remains strong because we avoided using the subprime market unethically. I can't vouch for whether or not Wells Fargo Financial ever referred lenders "up" to Wells Fargo Banks; but one thing about CitiGroup puzzles me in light of the losses they are incurring (and the layoffs they are planning;) whatever gave them the idea that they would be able to absorb Wachovia? Where they counting on receiving bailout money when they made their bid? It is a fact that their bid entailed Fed assistance, where Wells' is structured without any Fed assistance.
    I got lucky when Wells Fargo hired me.

  • oyun says:

    thank you very much

  • Cathy W says:

    I should not have read this - but I saw the link in the sidebar, and thought it would be worthwhile. It both was and wasn't...I was vaguely aware of the OCC intervention, but this was the clue-by-four I needed to be hit over the head with to really get what it all meant. Now I want to throw things.

  • llewelly says:

    And the right is trying to blame ACORN for the chaos.

    If you haven't the time to do all of this sort of research, the safest guess is that when the right is accusing group X of causing a problem, group X probably made a best effort to prevent the problem from happening in the first place.

  • Austin King says:

    Thanks for this excellent analysis. When Senator McCain made much the same right-wing argument in an ad, that "ACORN forced banks to make risky loans, the same types of loans that caused the crisis", ACORN responded forcefully with a 14 page report comparing the records of ACORN and McCain in the lead up to the crisis. That report may be of interest to your readers, and is available here:

  • Josh Carey says:

    Mike Dumfords' degree in zoology really qualifies him to speak knowedgeably about the cartoon animals who reside in D.C. and he should speak about the brayers in Hollywood. There is little doubt the current mess started in 1977 with the enactment of the CRA, and the subsequent abuses by both parties, the financial world and other self interest groups. However, applying a biased hostile view or perspective is not going to solve the dilemna as Mike has done. We need intelligence, not vituperation.

  • JohnnieCanuck says:

    Josh, you forgot to cite (with references) one instance where your research showed that Mike erred in his investigation or his conclusions.

  • Davis says:

    There is little doubt the current mess started in 1977 with the enactment of the CRA...

    Yes, except for all those economists and data demonstrating that the CRA was not responsible for the current crisis. Ignoring such overwhelming evidence against this claim, there is little doubt it's true. Because clearly non-regulation of financial instruments can't be to blame, as magic Free Market fairy dust makes sure unregulated markets produce optimal outcomes.

  • JohnnieCanuck says:

    Optimal outcomes for some of the CEOs, CFOs and traders, though.
    Really! All this complaining about how some people made a few hundred million at the expense of a world wide recession. Wadda buncha crybabies. There's always a silver lining, if you just look for it.

  • SassyFrassy says:

    Comment: LET'S TALK ECONOMICS AND ACORN--and what has led to our "meltdown"
    prior to 911 when DEMOCRATS WERE IN OFFICE the Usa sent our law enforcement to Yeman to arrest Osama bin laden. The Yeman ambassador promptly got into a 'turf battle" with USA law enforcement to claim the USA LAW ENFORCEMENT was "infringing" on YEMAN ambassadors "turf".
    So what happened OUR USA LAW ENFORCEMENTS WERE TOLD by DEMOCRATS--to go home empty handed. The DEMOCRAT Administration didn't know at the time their irresponsible actions had paved the way for terriorist to make plans and lay groundwork for 911.
    The Wall Street journal at that time printed a small article on it and to the recent it has been discussed but apparantly NOT ENOUGH.
    I submit for your reading NY Times 1999 - MUST READ!
    Well, it???s about time, the mainstream ???brainwashing media??? is finally coming out with the truth on this meltdown???
    I think if they would???ve come out with the truth right away instead of letting obama camp point fingers at the Bush Admin. THE Gallup polls etc would HAVE LOOKEDA whole lot different FROM RIGHT NOW!
    I just hope the ???American People??? Get it ~ before it???s too late!
    Look! The New York Times is catching up to the American important for ALL Americans to know who is responsible for this Economic Meltdown we are experiencing???in fact, some of you might remember that I posted the notice from Bill Clinton himself [I posted again, what Bill said at the bottom of this post]
    Who???s administration
    caused the problem??? See below.
    foresight!! Take a gander at this while they try to lay blame for the whole meltdown???
    9 years ago???this one is priceless and worth the read- right out of New York Times
    September 30, 1999
    Fannie Mae Eases Credit To Aid Mortgage Lending by steven A Holmes where the DEMOCRATS admitted that faulty lending pracitces along with ACORN activities have brought use to the crossroads our Nation is today.
    Bill Clinton knows who is responsible for this NATIONAL CRISIS!

  • Troublesome Frog says:

    Josh Carey

    There is little doubt the current mess started in 1977 with the enactment of the CRA, and the subsequent abuses by both parties, the financial world and other self interest groups.

    Ignoring the facts that the data doesn't bear you out, that you've posted no evidence of your own, that your understanding of the CRA is probably not all that good, and that you disagree with a number of prominent experts, let's do a thought experiment:
    You run a bank. You're not lending out to filthy poor people because it's bad business. The bad old liberal government says, "You now have to lend to these people." You know that those loans are going to be unprofitable. Do you:
    a) Loan out the bare minimum to comply with the law, cut your losses, and bitch about it to your golf buddies
    b) Leverage yourself out the wazoo and make truckloads of those loans to every poor person you can find who will listen.
    I don't run a bank, but it seems to me that if I really believed that those loans would be unprofitable, I almost certainly wouldn't have chosen b. I would have chosen a. So why did all the lenders choose b?
    Looking forward to your incisive analysis,
    T. Frog

  • Steve Sailer says:

    Thanks. Very informative.
    However, it's more complicated than this. What happens is that the 600 "community organizations" that belong to the National Community Reinvestment Coalition (which describes itself as "the nation's trade association for economic justice") hear about an upcoming bank merger, they start protesting to the feds over discrimination, predatory lending, redlining, reverse redlining, or whatever.
    If they make enough noise to threaten the merger, the acquiring bank winds up buying the protesters out with a giant commitment of lending to minority and lower income neighborhoods (plus some cash donations straight to the community organizations). The National Community Reinvestment Coalition boasted of $4.2 trillion of CRA commitments in a 2005 report.
    For example, Bank of America pledged $1.5 TRILLION over ten years to Community Reinvestment Act-qualified borrowers when they bought Countrywide in 2008. JP Morgan chase pledged $800 billion in CRA stuff when they bought Bank One in 2004. The late, not so great Washington Mutual promised $375 billion for CRA when it bought Dime Bank in 2001. Google on these and you can read all about them. A small percentage goes to community organizations, which is big money for them.
    Maybe some of the protesters were sincere about predatory lending when they started out, maybe not, but eventually they get bought out.
    So, the CRA winds up as a classic shakedown racket.
    Obviously, the fools running WaMu or B of A weren't forced to lend insane sums to whole bunch of deadbeats. They agreed with the community organizers, and Congress, and Clinton, Bush, and Obama, that it was a swell idea, a great way to make profits. But, when you stop and think about it, you can see the problem -- the CRA allowed only Kool-Aid drinkers like WaMu's Kerry Killinger to buy other banks. Realists who didn't want to lend huge amounts to likely deadbeats just because they lived in minority neighborhoods weren't allowed to buy other banks. So, the crazy stupid bankers like Killinger bought out the realists, making the whole industry over time crazy and stupid for lending to deadbeats.

  • HoosierHawk says:

    Gee, that was a really long article that has nothing to do with what it thinks it's about. Did the OCC step in and impose national guidelines? Yes. Why? Because recent changes in banking laws allowed banks to operate interstate. Prior to that,commercial banks could only operate within a given state. Once Congress, in order to create competition, opened up interstate banking, the federal government, in one of it's few LEGITIMATE roles, created national standards,and overrode the states. It is so weird to read a rant on a decidely liberal blog that's upset about state's rights being abused, and about an issue that is clearly Federal - interstate commerce
    Has ACORN concerned itself with "predatory" lending? Yes, does that have anything to do with the economic crisis? No. These defaulting loans are not predatory. Nobody is losing an investment they made because they were taken advantage of,else it would be actionable. They bought houses without any real investment, and at historically excellent interest rates to boot. They got in over heads (housing bubble burst/recession). The only motivation a bank has to not lend money is risk that the loan will default. That motivation went away when the loans (and the risk)could be sold to Fannie Mae, for a profit. Fannie published (actually way beyond that, they created desktop software that contained) underwriting guidelines for loans they would purchase.
    Without Fannie to buy risky(sub-prime)loans, none of this could have happened. ACORN's role was to push for ever looser underwriting guidelines, affordable housing, everyone a homeowner, etc. The obvious fact is that poor credit risks are just that, very bad decisions were made by the banking committees in Congress concerning Fannie and Freddie.
    The Lehman's of the world are/were investment (not commercial) banks, they did exactly what they were motivated to do, which was to buy secure (theoricaly gov backed) packages of loans that had reasonable returns. They created a false sense of security by spreading the perceived risk around using credit default swaps (a form of insurance), rather than having capital reserves to cover losses.
    The problem with that is that the risk models being used were not accurate. Under normal circumstances, the risk that I will default on my mortage has some odds attached to it, that risk is totally unrelated to the odds that you will default on yours. If I wreak my car, it doesn't change to odds that you will wreak yours. Unfortunately, the shear amount of loans that Fannie packaged created systemic risk, the conditions that might lead to me defaulting may very well cause you to default also. The cash reserves aren't adequate to cover the losses.
    I can't fault commercial banks for underwriting loans to be sold to the NGOs using the NGO's own guidelines, they were just middlemen. I can fault the investment banks for drastically underappreciating the scale of the risks they were taking, and for "enabling" Fannie by continuing to purchase the packages, in a just world they would eat all the losses. I can fault those who took out loans that they were not able to pay, they too should eat their loss. Most of all, I fault Congress for allowing Fannie to abandon it's core mission, for allowing Fannie management to turn the non-profit into a for-profit so that they could award themselves nice fat bonuses. Those fake profits weren't based on a legitimate business plan, they were due to perception of government backing and Fannie's tax free status.

  • Bank Exec says:

    It seems that ACORN is unhappy with what they wanted and got, banks were very happy prior to 1977 and the CRA act started a series of events that changed the conservative face of banking. Subprime loans are a result of CRA, how else would low income or poor credit score borrower qualify for some of these loans CRA mandated. Unfortuntley it got out of hand, and subprimes became a cancer, and the gov that created it failed to contol it.