As I have pointed out too many times to cite, when “affirmative action” was first imposed on the federal government by presidential executive orders (Kennedy’s 10925 in 1961; Johnson’s 11246 in 1965) government agencies and contractors were barred from discriminating against “any employee or applicant … because of race, color, religion, sex, or national origin,” and they were required to take “affirmative action” to ensure that all applicants and employees were treated “without regard to race, creed, color, or national origin.”
Over time, as we’ve seen, the meaning of “affirmative action” was reversed, so that it now requires precisely what it was originally designed to prevent — treating some applicants and employees better and others worse because of their race or ethnicity.
This, as I’ve said, is an old story, at least here. But even old stories can seem fresh when they are discovered in new and unfamiliar settings. Thus, to borrow from that great philosopher, Yogi Berra, I had a very strong “déjà vu all over again” feeling when I came across the following excerpted passage in Peter Wallison’s excellent discussion of the origins of the current financial crisis.
As originally enacted in 1977, the CRA [Community Reinvestment Act] vaguely mandated regulators to consider whether an insured bank was serving the needs of the “whole” community. For 16 years, the act was invoked rather infrequently, but 1993 marked a decisive turn in its enforcement. What changed? Substantial media and political attention was showered upon a 1992 Boston Federal Reserve Bank study of discrimination in home mortgage lending. This study concluded that, while there was no overt discrimination in banks’ allocation of mortgage funds, loan officers gave whites preferential treatment. The methodology of the study has since been questioned, but at the time it was highly influential with regulators and members of the incoming Clinton administration; in 1993, bank regulators initiated a major effort to reform the CRA regulations.
In 1995, the regulators created new rules that sought to establish objective criteria for determining whether a bank was meeting CRA standards. Examiners no longer had the discretion they once had. For banks, simply proving that they were looking for qualified buyers wasn’t enough. Banks now had to show that they had actually made a requisite number of loans to low- and moderate-income (LMI) borrowers. The new regulations also required the use of “innovative or flexible” lending practices to address credit needs of LMI borrowers and neighborhoods. Thus, a law that was originally intended to encourage banks to use safe and sound practices in lending now required them to be “innovative” and “flexible.” In other words, it called for the relaxation of lending standards, and it was the bank regulators who were expected to enforce these relaxed standards….
The point here is not that low-income borrowers received mortgage loans that they could not afford. That is probably true to some extent but cannot account for the large number of sub-prime and Alt-A loans [“those made to speculative buyers or without the usual underwriting standards”] that currently pollute the banking system. It was the spreading of these looser standards to the prime loan market that vastly increased the availability of credit for mortgages, the speculation in housing, and ultimately the bubble in housing prices.
The original CRA, in short, required something similar to the original version of affirmative action. Later, as with affirmative action, a determination to eradicate an exaggerated amount of discrimination led to the lowering of lending standards for certain preferred groups of borrowers, and this degradation of standards then spread throughout the system.
The result: a multitude of affirmative action borrowers mismatched with mortgages they could not afford. The determination to extend home ownership to far more people than market forces could support initially led to record numbers of homeowners … and then, when the government inflated bubble burst, led to record numbers of foreclosures.
Moral: it is dangerous and counter-productive to lower or eliminate fair and reasonable standards.
