San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Community Reinvestment Act (CRA) of 1977

Red Lining

When people found their application for a mortgage turned down by banks it was very easy to attribute the rejection to some socio-economic aberration. This was particularly true if they knew of other applicants of circumstances similar to themselves who did get mortgages. The primary socio-economic aberrations blamed were racial discrimination and red lining.

Red lining was the practice, real or imagined, of banks refusing to grant mortgages for the the purchase of houses in certain neighborhoods. The neighborhoods targeted were one involving a significant risks. The risks could be of declines in market value as a result of the emergence of problems of gangs, crime and vandalism. The avoidance of such risks would be a perfectly rational business decision. Those who had their application for a mortgage turned down could easily imagine that the neighborhood in which they can wanted to buy a house had been red lined. If they had an income adequate to justify a mortgage they felt the bank was falsely ascribing a risk of not having the mortgage repaid. They wanted the practice of red lining legally prohibited. There seems to be an image of bankers as greedy but simultaneously willing to turn down profitable business.

Since many of the unsuccessful applicants were African-American or Hispanic it was also easy to attribute to the turning down of their application to racial discrimination. This was particularly plausible when the unsuccessful applicants had above average incomes. However income is only one part of the evaluation process. Credit history is equally significant. The banks wants to ascertain whether they will be repaid. A borrower with a bad credit history is less likely to repay a loan than a borrower with a good credit history but lower income. Irresponsible behavior can dissipate even a large income.

Whether justified or not there was a large population that felt they had been unjustly denied access to credit. To them that denial was not just a denial of the opportunity to be a homeowner; it also denied them the opportunity to receive capital gains. It was easy to believe that their lesser wealth was a result of not having access to such capital gains.

So in the 1970's there was fertile field for community organizers to exploit. One of these community organizers in Chicago was Gale Cincotta. She was convinced that red lining was preventing her neighborhood in west Chicago from developing. She and other members of a community organization talked to bank officials. When that did not produce the results she wanted she organized an action in which her followers interrupted bank business by flooding the bank with demands for time consuming services. Following that action she organized a march of 600 to a meeting of the Chicago city council. When that action failed to produce results she organized 1200 to make a protest at the Department of Housing and Urban Development, a Federal Govenment Agency. That action produced significant results, an investigation of the situation in west Chicago by the Nixon Administration.

Community Organizers

Gale Cincotta then sought to prevent a bank from closing its local branch. She organized a a protest at the bank and the bank capitulated. It kept its branch open and promised to invest several million dollars in west Chicago. This victory led her to found in 1972 two organizations, the National People's Action (NPA) and the National Training and Information Center (NTIC).

By 1975 she had now acquired a significant amount of political power. In that year she organized a conference in Chicago on the matter of red lining. That brought the issue to the attention of the general public and Congress. In 1976 Congress passed the Home and Mortgage Disclosure Act and Gerald Ford signed it into law. This act required banks to disclose where they were granting mortgages. That information allowed Gale Cincotta and other community organizers to make accusations of red lining and racial discrimination against banks. The media picked up and publicized the issue.

The Community Reinvestment Act of 1977

In 1976 Gale Cincotta announced the formulation of new policy that ultimately became the Community Reinvestment Act (CRA). She propounded the notion that it was immoral for banks to take the deposits of people in one community and lend them for investment in another community. Behing this idea was the belief, held by many not in business, that businesses can easily operate at a profit and constraining their actions for social purposes imposes no cost on their operations. According to Gale Cincotta's belief, banks have a duty to lend to people in the neighborhoods where they operate.

Cincotta's ideas caught the attention of William Proxmire, a U.S. Senator for Wisconsin. Proxmires background was in journalism and he saw no problem in forcing banks to lend to people in the neighborhoods where they operate even if such loans cannot be justified on the basis of profitability. Proxmire believed that something like Cincotta's proposal would be required to end racial discrimination of banks.

Proxmire had his staff cooperate with Cincotta and her associates. Basically the Community Reinvestment Act of 1977, a piece of legislation of enormous financial and economic consequence, was written by Gale Cincotta and her community organizer associates.

The bill as written by Gale Cincotta and Shel Trapp, another community organizer, required that banks maintain records of where they made loans and that information would be made available to community organizations.

As written the CRA provided that when a bank appeared before regulatory agencies the comminity organizers had a right to testify about the bank's fulfillment of its duty to serve the needs of the community in which it operates. This enabled the community organizers to extort large donations from banks. If a bank wanted to undertake any new action it knew that it would have to payoff the community organizers to get the request approved by the bank regulators.

(To be continued.)

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