Don't blame the poor for this mess

Accomplished Googlers can probably find the original talking points off which dozens of conservatives made essentially the same case: The Community Reinvestment Act of 1977 caused the financial crisis. For example, a Wall Street Journal editorial lumped CRA together with far-more-plausible causes of the meltdown. This liberal-inspired law, it complained, "compels banks to make loans to poor borrowers who often cannot repay them."

In fact, the CRA had about zero to do with today's problems. Its accusers are "know-nothings," Aaron Pressman writes on BusinessWeek.com. He says the law "was actually weakened by the Bush administration just as the worst lending wave began."

The CRA requires federally insured banks and thrifts to lend in the low-income neighborhoods where they take deposits, but consistent with safe banking practices. It was created to stop redlining, the practice whereby banks refused to lend money in certain areas — read minority neighborhoods — regardless of their residents' credit histories.

The most obvious clue that CRA did not cause the mess is its date. The musical "Annie" opened in 1977, and the Eagles' "Hotel California" was the No. 1 song. That was a long time ago, 31 years, to be precise. If the CRA created this time bomb of lousy loans, why didn't it go off in 1980 or 1996?

The writing of crazy mortgages for low-income people — loans with exploding interest rates, brutal fees and no demands for documentation — was a post-2003 phenomenon. In 2004, the Bush administration actually slashed CRA regulation, freeing small banks and thrifts from its toughest standards.

"These institutions no longer had to make subprime loans to low-income people," Mark Thoma, an economist at the University of Oregon, told me. "That should have reduced the volume if the CRA was driving it." On the contrary, subprime lending increased.

CRA was a minor player in the mortgage orgy. Since the late '90s, half of subprime loans have been made by independent mortgage companies not subject to CRA rules, University of Michigan Law School professor Michael Barr told Congress in February. Another 30 percent came from affiliates of banks or thrifts with little CRA supervision. That left only one in five subprime loans fully governed by CRA.

Furthermore, companies not covered by CRA made subprime loans at more than twice the rate of lenders that were, according to Janet Yellin, president of the San Francisco Federal Reserve Bank. The idea that CRA brought the banks down is "just ridiculous," Thoma said.

The ugly truth is this: The redlining that led to the passage of CRA has been replaced by reverse-redlining. Lenders didn't have to be dragged into low-income neighborhoods. They rushed in. It was there that they could push their complicated mortgages onto the elderly, blacks and Hispanics, and then sell the loans to somebody else. At least 40 percent of the holders of subprime mortgages could have qualified for cheaper prime mortgages, according to one study.

Far from being spurned by financiers, low-income Americans have become their cash cow. Payday lenders are listed on the New York Stock Exchange.

Yes, low-income people can be credit risks. That cannot be ignored. But this financial scandal is the work of fat cats, enabled by a permissive government. There's something highly indecent about blaming it on an innocuous law meant to remove some of the unfairness in the lives of the working poor.

Providence Journal columnist Froma Harrop's column appears regularly on editorial pages of The Times. Her e-mail address is fharrop@projo.com