Remarks by
FDIC Chairman Sheila C. Bair
Before the
Consumer Federation of America
December 4, 2008
Good morning and thank you for inviting me to speak.
The main reason I'm here is to have a vigorous discussion with you about the consumer
issues we now face as a result of the financial crisis.
But first I want to clear up some myths that have been circulating lately ... in particular,
that the Community Reinvestment Act caused the financial crisis.
And then I want to share a few thoughts on how we can improve and modernize
consumer protections for financial services.
I'd also like to share a few thoughts on our continuing partnership to fight unnecessary
foreclosures.
I think we can agree that a complex interplay of risky behaviors by lenders, borrowers,
and investors led to the current financial storm. To be sure, there's plenty of blame to go
around.
However, I want to give you my verdict on CRA: NOT guilty.
Point of fact: Only about one in four higher-priced first mortgage loans were made by
CRA-covered banks during the hey-day years of subprime mortgage lending (2004-
2006). The rest were made by private independent mortgage companies and large bank
affiliates not covered by CRA rules.
You've heard the line of attack: The government told banks they had to make loans to
people who were bad credit risks, and who could not afford to repay, just to prove that
they were making loans to low- and moderate-income people.
Let me ask you: Where in the CRA does it say to make loans to people who can't afford
to repay? Nowhere!
And the fact is, the lending practices that are causing problems today were driven by a
desire for market share and revenue growth ... pure and simple.
CRA isn't perfect. But it has stayed around more than 30 years because it encourages
FDIC-insured banks to lend in low- and moderate-income (or LMI) areas and, I quote,
"consistent with the safe and sound operation of such institutions."
FDIC Chairman Sheila C. Bair
Before the
Consumer Federation of America
December 4, 2008
Good morning and thank you for inviting me to speak.
The main reason I'm here is to have a vigorous discussion with you about the consumer
issues we now face as a result of the financial crisis.
But first I want to clear up some myths that have been circulating lately ... in particular,
that the Community Reinvestment Act caused the financial crisis.
And then I want to share a few thoughts on how we can improve and modernize
consumer protections for financial services.
I'd also like to share a few thoughts on our continuing partnership to fight unnecessary
foreclosures.
I think we can agree that a complex interplay of risky behaviors by lenders, borrowers,
and investors led to the current financial storm. To be sure, there's plenty of blame to go
around.
However, I want to give you my verdict on CRA: NOT guilty.
Point of fact: Only about one in four higher-priced first mortgage loans were made by
CRA-covered banks during the hey-day years of subprime mortgage lending (2004-
2006). The rest were made by private independent mortgage companies and large bank
affiliates not covered by CRA rules.
You've heard the line of attack: The government told banks they had to make loans to
people who were bad credit risks, and who could not afford to repay, just to prove that
they were making loans to low- and moderate-income people.
Let me ask you: Where in the CRA does it say to make loans to people who can't afford
to repay? Nowhere!
And the fact is, the lending practices that are causing problems today were driven by a
desire for market share and revenue growth ... pure and simple.
CRA isn't perfect. But it has stayed around more than 30 years because it encourages
FDIC-insured banks to lend in low- and moderate-income (or LMI) areas and, I quote,
"consistent with the safe and sound operation of such institutions."
Another question: Is lending to borrowers who can not afford to repay "consistent with
the safe and sound operations"? No, of course not.
CRA always recognized there are limitations on the potential volume of lending in lower-
income areas due to safety and soundness considerations, and that a bank's capacity
and opportunity for safe and sound lending in the LMI community may be limited.
That is why the CRA never set out lending "target" or "goal" amounts.
That is why CRA partners − many of you here today (banks, community groups, and,
yes, even regulators) − have worked together for three decades to figure out how to do
it safely.
And that is why several months ago, we hosted the FDIC Forum on Responsible Low-
and Moderate-Income Lending where leading experts spelled out the best ways to
create profitable, responsible and sustainable mortgage lending, and strategies to
rejuvenate the secondary market for these loans.
Also attending the forum were Treasury Secretary Hank Paulson, Federal Reserve
Board Chairman Ben Bernanke, and Jamie Dimon, the head of JPMorgan Chase & Co.
− which shows the level of support for LMI lending.
So let the record show: CRA is not guilty of causing the financial crisis.
Making CRA better
Still CRA isn't perfect. And we can make it better if we try. Now is the time to put more
emphasis on the qualitative aspects of lending in CRA examinations.
Does an institution's lending benefit or harm consumers?
Is lending responsive to credit needs?
Illegal credit practices (such as violations of certain consumer protection regulations)
can have a negative effect on a bank's CRA rating, even if they are outside an
institution's assessment area.
However, loans that violate prudential requirements of sustainability and affordability
should also impact CRA ratings.
We need to take a closer look at this.
Higher-priced loans made under terms the borrower cannot repay are not "responsive"
to credit needs under CRA. In fact, they're irresponsible under any circumstances.
the safe and sound operations"? No, of course not.
CRA always recognized there are limitations on the potential volume of lending in lower-
income areas due to safety and soundness considerations, and that a bank's capacity
and opportunity for safe and sound lending in the LMI community may be limited.
That is why the CRA never set out lending "target" or "goal" amounts.
That is why CRA partners − many of you here today (banks, community groups, and,
yes, even regulators) − have worked together for three decades to figure out how to do
it safely.
And that is why several months ago, we hosted the FDIC Forum on Responsible Low-
and Moderate-Income Lending where leading experts spelled out the best ways to
create profitable, responsible and sustainable mortgage lending, and strategies to
rejuvenate the secondary market for these loans.
Also attending the forum were Treasury Secretary Hank Paulson, Federal Reserve
Board Chairman Ben Bernanke, and Jamie Dimon, the head of JPMorgan Chase & Co.
− which shows the level of support for LMI lending.
So let the record show: CRA is not guilty of causing the financial crisis.
Making CRA better
Still CRA isn't perfect. And we can make it better if we try. Now is the time to put more
emphasis on the qualitative aspects of lending in CRA examinations.
Does an institution's lending benefit or harm consumers?
Is lending responsive to credit needs?
Illegal credit practices (such as violations of certain consumer protection regulations)
can have a negative effect on a bank's CRA rating, even if they are outside an
institution's assessment area.
However, loans that violate prudential requirements of sustainability and affordability
should also impact CRA ratings.
We need to take a closer look at this.
Higher-priced loans made under terms the borrower cannot repay are not "responsive"
to credit needs under CRA. In fact, they're irresponsible under any circumstances.