Op-Ed: Widen Scope Of What Caused Meltdown?

Op-Ed

Investor's Business Daily, Sep 24 -

In an alleged effort to protect against a recurrence of the financial collapse of 2008, Congress is considering a slew of new mandates, regulations and agencies.

At the top of the list is an expansion of the very government mandate that is at the heart of the financial collapse, the Community Reinvestment Act.

It appears that rather than learning from mistakes of the past, Congress is taking steps that could exacerbate the problems in the future.

The CRA has been credited by many experts as a key contributor to the financial meltdown of 2008. Originally introduced in 1977, it was established to ensure that low-income individuals and minorities were receiving fair and equal access to credit.

A laudable goal, but like many well-intentioned government mandates, many unintended consequences have resulted.

Too Many Loans

One of the lessons we learned from the financial crisis was that too many people were approved for loans they couldn't afford, and plenty were originated due to pressure to meet CRA mandates.

Since 99% of banks are already in compliance with the goals of the CRA and providing low-income families with the opportunity to finance home purchases, the mandate was overreaching and forced banks to make irresponsibly risky financial transactions.

We have barely begun to pull ourselves out of the financial meltdown, and Congress is already considering expanding the scope of the CRA -- requiring additional financial institutions to comply with its mandates.

Instead of subjecting credit unions, mortgage lenders, insurance companies and others to the CRA, which encourages low underwriting standards and risky lending behavior, Congress should consider reforming the law or, as some have suggested, repealing it all together.

Unfortunately, Congress is neglecting common sense and bypassing cautionary measures; the bigger-is-better mind-set is again dominating the halls of the Capitol.

Interestingly enough, the same week the House began to readdress the CRA, Acorn -- a prime beneficiary of that law -- made unflattering headlines involving additional arrests for voter registration fraud and videos showing the outfit counseling a couple to evade tax laws and seek federal housing grants to start a prostitution ring.

These recent events should have raised questions in the minds of lawmakers about the course of action on which they were about to embark.

As Manhattan Institute senior fellow Steven Malanga has said, "Acorn's a creature of the CRA."

Acorn and similar groups used the CRA to lay their foundation. In fact, CRA-related deals between banks and these community groups have resulted in an estimated $10 billion exchange.

Malanga continues: "Acorn found its way into the mortgage business through the Community Reinvestment Act, the 1977 legislation that community groups have used as a cudgel to force lenders to lower their mortgage underwriting standards in order to make more loans in low-income communities.

"Often the groups, after making protests under CRA, were then rewarded by banks with contracts to act as mortgage counselors in low-income areas in return for dropping their protests against the banks.

"In one particularly lucrative deal, 14 major banks eager to put CRA protests behind them in 1993 signed an agreement to have Acorn administer a $55 million, 11-city lending program. It was precisely such agreements that helped turn Acorn from a network of small local groups into a national player."

Due Diligence, Please

The fact is, not enough transparency exists under the CRA to even answer questions about the extent to which banks were forced into making such deals. And lest we find ourselves repeating our mistakes, Congress should seek out these answers. It is irresponsible for Congress to do otherwise.

Our nation cannot afford to face another financial calamity.

It is imperative that members of Congress and the Obama administration conduct due diligence before prescribing remedies.

It's more important to address these issues correctly than quickly. Rushing to meet arbitrary deadlines will be done at the peril of another collapse.

Bachmann, a Republican who represents Minnesota's 6th Congressional District, is a member of the House Financial Services Committee. She is also a federal tax attorney.

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