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Did a 31-year-old law giving poor people a break at the bank accidentally break the bank?

A lot of opinion leaders think so. From the editorial pages of The Wall Street Journal to talk shows to the op-ed page of The Register, people are charging that the Community Reinvestment Act of 1977 forced banks to make bad loans, leading to financial Armageddon.

There's just one problem: It isn't true.

A Register analysis of more than 12 million subprime mortgages worth nearly $2 trillion shows that most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the lenders covered by the law that did make subprime loans came late to that market – after smaller, unregulated players showed there was money to be made.

Among our conclusions:

• Nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from the law.
• State-regulated mortgage companies such as Irvine-based New Century Financial made just over half of all subprime loans. These companies, which CRA does not cover, controlled more than 60 percent of the market before 2006, when banks jumped in.
• Another 22 percent came from federally regulated lenders like Countrywide Home Loans and Long Beach Mortgage. These lenders weren't subject to the law, though some were owned by banks that could choose to include them in their CRA reports.
• Among lenders that were subject to the law, many ignored subprime while others couldn't get enough.
• Among those standing on the sidelines: Bank of America, which made no subprime loans in 2004 and 2005; in 2006 and 2007 subprime accounted for just 2 percent of its loan portfolio. Washington Mutual, meanwhile, raised its subprime bet by 20 times to $5.6 billion in 2006 – on top of its already huge exposure through its ownership of Long Beach Mortgage.

Since the federal takeover of mortgage giants Fannie Mae and Freddie Mac in September and particularly since the federal bailout of Wall Street, some have argued that the reinvestment law is to blame for the mortgage meltdown and credit crunch.

In a Sept. 22 editorial, The Wall Street Journal said that the law "compels banks to make loans to poor borrowers who often cannot repay them. Banks that failed to make enough of these loans were often held hostage by activists when they next sought some regulatory approval."

In a Sept. 15 editorial, Investors Business Daily wrote that by strengthening the reinvestment law in the late 1990s, President Clinton "helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but 'predatory.' "

In a Sept. 18 appearance on MSNBC, conservative economist Larry Kudlow said, "The Community Reinvestment Act literally pushed these lenders to make low-income loans. … Liberal, guilt(y) consciences forced banks and lenders to make lousy, substandard loans."

And in an Oct. 13 op-ed in The Register, Chapman University President James Doti, an economist, wrote that the law "pressured banks to make loans and mortgages to people who might not be the best credit risk. In fact, Clinton administration Attorney General Janet Reno threatened legal action against banks that didn't loosen up mortgage requirements."

The criticisms of the reinvestment act don't make sense to Glenn Hayes. He runs Neighborhood Housing Services of Orange County, which works with banks to provide CRA loans to first-time homebuyers. In its 14-year history, the nonprofit has helped 1,200 families buy their first homes. Score so far: No foreclosures and a delinquency rate under 1 percent.

"It is subprime that's really causing it," Hayes said of the mortgage crisis. "But CRA did not force anyone to do subprime."

Bob Davis, executive vice president of the American Bankers Association, which lobbies Congress to streamline community reinvestment rules, said "it just isn't credible" to blame the law CRA for the crisis.

"Institutions that are subject to CRA – that is, banks and savings asociations – were largely not involved in subprime lending," Davis said. "The bulk of the loans came through a channel that was not subject to CRA."

Congress passed the Community Reinvestment Act to crack down on "redlining," the practice by banks of refusing loans to neighborhoods where most residents are minorities or earn low incomes. The law applies to all federally insured banks and thrifts that take deposits. It generally requires banks to help potential customers near their branches, typically by making loans, investing or providing other services such as financial education.

A companion law, the Home Mortgage Disclosure Act, requires every large home lender to report annually on every home loan application they receive. (No names or streets are listed.) Those reports feed a database that in turn allows regulators, community activists and others to monitor home lending in virtually every neighborhood in America.

Beginning in 2004, federal regulators also have required lenders to report on high-priced loans – those with rates at least three percentage points higher than U.S. Treasury notes of comparable maturity. While the mortgage industry defines subprime loans by credit scores, Federal Reserve Board analysts believe that subprime and Alt-A loans fall into their high-priced loan category.

The Register used that database for its analysis. During the four years covered by our analysis, lenders made 55 million home loans, including 12 million subprime loans.

In its glory days, subprime lending was a lucrative business that paid six-figure salaries to 20-something salespeople and made fortunes for top execcutives. Nowhere were the riches more evident than in Orange County, home to industry giants New Century, Ameriquest, Argent and Fremont.

But the money spread far beyond Orange County, thanks to Wall Street's years-long love affair with subprime. In 2005 and 2006, subprime lenders sold about 70 percent of their loans by dollar volume to investors – principally to finance and insurance companies or by packaging the loans in highly rated securities.

Fannie and Freddie, the federally sponsored mortgage buyers, were bit players in this market. Together they bought about 3 percent of all subprime loans issued from 2004 through 2007, most of that in 2007 alone.

In 2007 Wall Street turned its back on subprime. That year, subprime lenders were forced to keep 60 percent of their loans on their own books or on the balance sheets of their affiliates.

That was the last fatal step in a financial high-wire act.

Since then, most of the 25 companies that dominated subprime lending between 2004 and 2007 have shut down or been sold at fire-sale prices.

Just eight of the 25 top subprime lenders were subject to the reinvestment law. But among those eight are two of the summer's most prominent failures – Washington Mutual and IndyMac Bank. Together with its Long Beach Mortgage subsidiary, WaMu made $74.2 billion in subprime loans. IndyMac specialized in "Alt-A" loans to customers who had good credit but couldn't qualify for top-drawer loans.

By RONALD CAMPBELL