The problem with the CRA was the strict evaluation criteria that banks were under to score highly. Remember that the banks not scoring well were not allowed mergers to happen, were not allowed to build new branches etc. In the criteria below look at the number of instances where lo or moderate income individual or areas are addressed. The CRA was specifically targeting these individuals and areas. Also note "Among the assessment criteria are the geographic distribution of lending, the distribution of lending across different types of borrowers, the extent of community development lending, and the use of innovative or flexible lending practices to address the credit needs of low- or moderate-income individuals or areas. While not actually requiring by law the banks do this, they were "rating" them against this criteria and holding the you "are not going to expand your business" gun to their heads.
Also note that these subprime loan policies adopted by the mortgage lending institutions default percentages were not highest in these "low-income" areas but in the moderate to higher income areas. The places where perhaps the borrowers were at a steady job, could make the monthly payments etc. but bought housing so far outside of their real ability that when the economy started to go down, they lost their jobs, the higher interest rates of the subprime mortgage they signed up to started to kick in, and the value of their homes started to decrease so that they were now upside down-----boom----foreclosures. And the rates here were higher than in the low-income areas.
The problem again IMO is the government trying to regulate the industry and the unintended consequences that happen.
The CRA was trying to fix the problem that the banks in low-come areas were taking the money for deposit from those areas but not reinvesting into those areas through loans to people for houses, small businesses etc. The government thought this unfair and tried to regulate it. So the banking started to make ill advised loans both in these areas and in others.
So di I have an alternative idea to counter this? No but hindsight says this was not the way to go about it.
The Three CRA Performance Tests
The regulations that implement the CRA set forth three tests by which
the performance of most large retail banking institutions is evaluated: a
lending test, an investment test, and a service test.
The lending test involves the measurement of lending activity for
a variety of loan types, including home mortgage, small business and
small farm loans. Among the assessment criteria are the geographic
distribution of lending, the distribution of lending across different types
of borrowers, the extent of community development lending, and the use
of innovative or flexible lending practices to address the credit needs of
low- or moderate-income individuals or areas.
The investment test considers a banking institution's qualified
investments that benefit the institution's assessment area or a broader
statewide or regional area that includes its assessment area. A qualified
investment is a lawful investment, deposit, membership share, or grant
that has community development as its primary purpose.
The service test considers the availability of an institution's
system for delivering retail banking services and judges the extent of its
community development services and their degree of innovativeness and
responsiveness. Among the assessment criteria for retail banking
services are the geographic distribution of an institution's branches and
the availability and effectiveness of alternative systems for delivering
retail banking services, such as automated teller machines, in low- and
moderate-income areas and to low- and moderate-income persons.
