WSJ: An article on a community loan activist and the Community Reinvestment Act

A Wall Street Journal article details the struggles of Matthew Lee, who is still fighting for the Community Reinvestment Act and to make banks stop predatory lending. Despite what some conservatives say, loans made under the CRA did not default at higher rates than normal. However, predatory, high-interest loans made outside the CRA in low-income or under-banked communities did.


One of the last times I saw Matthew Lee was in April 2004. Mr. Lee had taken his fight to bring credit to the underserved to a special meeting of the Federal Reserve that was considering J.P. Morgan Chase & Co.'s acquisition of Bank One Corp.

A modest and somewhat rumpled attorney, Mr. Lee chastised the $60 billion deal, arguing that J.P. Morgan had failed to provide enough credit to urban areas. He argued that the bank and its mega bank rivals financed predatory check-cashing stores across the country.

Mr. Lee won, sort of. J.P. Morgan pledged $800 billion in new credit over 10 years and promised to review its support of predatory lenders. The merger was approved.

After the meeting, Rev. Jesse Jackson called Mr. Lee, 44 years old, a prime mover in the modern civil-rights movement: the fight for access to capital. "He's an enemy of predatory exploitation," Rev. Jackson said.

It's six years later, and to say a lot has changed is like saying the housing market has hit a hiccup. The Community Reinvestment Act, the banking law Mr. Lee sought to enforce and build on, has come under fire for allegedly fueling the financial crisis through a wave of defaults. The act requires banks to offer loans to underserved areas, mainly urban, poorer neighborhoods.

But if you think the backlash against community lending and the banking law has changed Mr. Lee's perspective you'd be wrong. Through his Bronx-based organization Inner City Press/Fair Finance Watch, Mr. Lee continues to challenge the banking industry for ignoring poorer neighborhoods and its support of predatory lending practices.

"Persistence is the key," said Mr. Lee. "There are still groups interested in the intersection on consumer protection and Wall Street sleaze."

If anything, the attacks have made Mr. Lee more resilient in challenging banks to end its support—directly and indirectly—of predatory lending, an effort that includes subprime loans.

The Impact of CRA Loans
Critics argue that Community Reinvestment Act loans fueled the mortgage bubble by offering credit to those who would have otherwise been turned down. A 2008 report by the Competitive Enterprise Institute concluded that banks that conform to the act are more likely to be less sound and that CRA loans create higher costs for borrowers.

But the evidence is scant that the legislation played a role in the recent crisis. More than 80% of subprime loans were made by institutions or big bank subsidiaries that weren't subject to CRA, according to 2008 testimony by Michael Barr, a professor at the University of Michigan. And a 2008 study by Federal Reserve found no correlation between the financial crisis and CRA lending.

Federal Reserve Chairman Ben Bernanke said in 2007 that CRA loans "usually did not involve disproportionately higher levels of default."

"I understand that your average 'blame the liberals' may not understand that," Mr. Lee said. "But when you actually look into it, you find the real sleazeballs were companies like Ameriquest, Countrywide and New Century and they didn't make a single loan for CRA because they weren't covered by CRA."

The Big Bank Connection
That doesn't mean banks bound by CRA didn't participate in risky lending.

Big banks, such as Citigroup Inc., are just holding companies. Their subsidiaries had different missions. Citibank generally made prime loans and was covered by the law. CitiFinancial didn't have a CRA requirement, but it underwrote more subprime loans. And Citigroup's investment bank, packaged and sold risky loans from many sources to investors.

"There's a good argument that if CRA would have been enforced, people would not have been fleeced on their loans," Mr. Lee said. "And regulators, had they not enforced CRA so narrowly, that when you look at Citigroup underwriting Ameriquest loans, they [the regulators] would have said 'are you kidding?'"

Citigroup declined to comment.

Part of the dispute may have to do with what the banking law actually does. The act does not require banks to make loans to people without credit or considered risky. It only requires that it provide credit in areas where there's a lack of bank finance. CRA loans generally don't carry higher-than-market interest rates.

Such misunderstanding is why Mr. Lee continues to push banks in a climate where inner city lending—fairly or not—is under attack. Because the banking law challenges can only be made when a bank merger is announced and few mergers are being made, Mr. Lee is stockpiling information.

He's poring through annual mortgage data supplied by banks to see what markets they've abandoned. He's gathering information about J.P. Morgan's and Bank of America Corp.'s ties to World Acceptance, a small-loan, consumer finance company that makes subprime and controversial loans called 78s.

A J.P Morgan spokesperson declined to comment.

Fair Finance Watch also is targeting Wal-Mart Stores Inc. for its in-store "money centers" that charge for check cashing and same-day bill payment.

So, the fight goes on. But there is one part of Mr. Lee's job that has changed. He said he's now fielding calls from distressed homeowners—not necessarily CRA beneficiaries—who are wrestling banks looking to foreclose.

Said Mr. Lee, "I've actually had to learn more about workouts than I ever really wanted to know."