The study found:

Even with a good income, people of color were substantially more likely to be denied loans, the study found, with black borrowers experiencing the greatest disparities. Black borrowers with incomes exceeding $157,000 faced a 25 percent denial rate, compared with an 11 percent denial rate among whites making $39,250. The same pattern held true for high-income Asians and Hispanics.

Similarly, subprime loans were more common for high- and very-high-income black and Hispanic borrowers than for whites in any income group. Racial segregation of neighborhoods was an added factor in the Twin Cities because they are underserved by prime lending institutions, contributing to higher subprime loan rates for people of color.

In this video, professor Myron Orfield talks about the study and its implications:

John Dugan (Photo: Harry Connolly)

… [C]urrent market disruptions have clouded the accomplishments that CRA has generated, many of which we recognized last year during its 30th anniversary. There are even some who suggest that CRA is responsible for the binge of irresponsible subprime lending that ignited the credit crisis we now face. Let me squarely respond to this suggestion: I categorically disagree. While not perfect, CRA has made a positive contribution to community revitalization across the country and has generally encouraged sound community development lending, investment, and service initiatives by regulated banking organizations. CRA is not the culprit behind the subprime mortgage lending abuses, or the broader credit quality issues in the marketplace. Indeed, the lenders most prominently associated with subprime mortgage lending abuses and high rates of foreclosure are lenders not subject to CRA.

Dugan, a 2005 Bush appointee, also served the Department of Treasury under the first President Bush, and was Republican general counsel to the U.S. Senate Committee on Banking, Housing, and Urban Affairs. His remarks (full transcript) came during the Economic Community Partners annual meeting in Baltimore.

This North Minneapolis home was destroyed by foreclosure, arson and later the city's wrecking ball

All throughout North Minneapolis, 100-year-old trees are turning deep shades of gold and crimson. On some streets, the tall oaks look like lone survivors of a nuclear disaster, untouched by the blight over which their canopies cast long shadows. In fact, you don’t have to spend much time in North Minneapolis before a darkening picture becomes clear. Something happened here. Something serious and destructive and almost barbaric.

Entire blocks, like those near the corner of Sixth and 13th, have been destroyed. Gray boards cover windows and trash litters yards and alleyways of abandoned streets. There are nearly 900 vacant homes in North Minneapolis. And more than two-thirds of those are now condemned.

What happened here is what many housing experts call reverse redlining — predatory lenders targeting low-income and black and Latino neighborhoods with high-cost and imprudent loans. Conservative columnists, pundits, bankers and politicians like Minnesota’s own Michele Bachmann have taken to blaming the subprime fallout and subsequent credit crisis on the Community Reinvestment Act, a Carter-era program that was designed to require banks to make loans in areas from which they also took deposits. And housing and civil rights experts like Myron Orfield, a law professor at the University of Minnesota and the executive director of the Institute on Race and Poverty, and Geoff Smith of the Woodstock Institute, a policy and advocacy organization that specializes in housing research, say they couldn’t be more misguided.

Created more than 30 years ago, the CRA essentially worked like this: In turn for taking money from low-income communities, banks would have their lending practices examined by federal regulators to ensure they’re making loans for mortgages, small businesses and community development in those same neighborhoods. In other words, they’d be examined to ensure they weren’t discriminating against low-income neighborhoods that supplied them with monies to make loans to other customers.

But what actually happened in the last few years, Orfield says, is much different. “One of the purposes of the CRA was to ensure that prime credit would be extended into poor neighborhoods,” Orfield says. “And it never really has been that way. It’s been 30 years of enforcement, and it hasn’t really gotten better. Neighborhoods have become more racially segregated, particularly in the Twin Cities. The CRA has become perverted. It’s often become a way to have subprime and predatory lending and to reinvest in projects that deepened poverty. This is what CRA has come to mean.”

For one thing, the CRA never required banks and lenders to create risky loan packages and market them to consumers who would be unable to afford them after the terms changed. For another, the banks never had a specific quota to meet under CRA, but instead were simply required to show they reinvested back in the community.

Geoff Smith agrees with Orfield’s assessment, and says blaming the CRA is woefully misplaced. “The CRA wasn’t the problem,” he says. “The mortgage crisis went well beyond the scope of the CRA. What’s more, the vast majority of lenders were not covered by the CRA. In fact, it was a loophole in the CRA that subprime lenders were not covered under CRA by regulation.”

Targeting Twin Cities neighborhoods

Orfield is serving on a national bipartisan commission, co-chaired by two former Department of Housing and Urban Development Secretaries, Jack Kemp and Henry Cisneros, to study housing discrimination in America. The group has been taking testimony from homeowners in cities like Atlanta, Chicago and Boston. While the Twin Cities are not part of the investigation, Orfield says that Minneapolis and surrounding suburbs are taking a serious hit from reverse redlining and continued segregation.

“There is a lot of segregation in this metropolitan area, and it’s deepening,” Orfield says. “There’s a disproportionate share of these loans in black and Latino neighborhoods. The predatory action has certainly not only destroyed equity, it’s destroyed families and deepened racial segregation. And that’s not what the CRA was meant to do.”

Orfield says that neighborhoods hardest hit are North Minneapolis, South Minneapolis, Brooklyn Center, Brooklyn Park, Bloomington and Richfield. These were areas that had a higher concentration of loans created by mortgage shops like Countrywide, Ameriquest and other one-off subprime mortgage providers — lenders who were not under CRA regulation. In other words, they were lenders only looking to make a quick buck whose lending practices weren’t evaluated by regulators.

In an effort to compete with the growing number of mortgage shops, banks like Minneapolis-based U.S. Bancorp began making subprime loans. But these larger banks, which are FDIC insured and under CRA and larger federal regulations, often had thrifts, or subprime mortgage stores, that weren’t depositors and therefore not under CRA and federal rules. The nefarious loans, which could then be easily bundled and sold while brokers raked in quick cash from the close of the deal, were then purchased by companies like Freddie Mac, which began buying these subprime loans on the secondary market in 1998. That deal made it easier for banks and mortgage lenders to sell the loans and quickly remove them from their books.

Smith says don’t get it wrong, the CRA is not without flaws. For one thing, it didn’t regulate these mortgage shops that were preying on people in low-income neighborhoods. In fact, Smith says, it’s a flaw in the CRA that it doesn’t prevent these kinds of risky loans from being made. But it certainly wasn’t what drove these loans or the crisis. “The problem is pretty clear,” he says. “It was little regulation, and little accountability.” What’s more, it was institutionalized racism.

What’s next for the Twin Cities?

Orfield says that as the subprime crisis continues to unfold and minorities get hit the worst, Minneapolis is fast becoming more racially segregated. “We are going backwards,” he says. “We are actually so far behind where we need to be. This is a problem for the entire city. It affects education, crime rates, prison populations. It affects everything. And we’re actually seeing the city use this as a means to put up low-income housing in low-income areas. But segregating housing is not the answer.”

Orfield says he hopes cities will use this as an opportunity to reexamine both state and federal housing programs, from HUD to city-funding housing units. Neighborhoods, he says, need to be diverse both racially and economically to thrive.

The city of Minneapolis recently received a $5.6 million federal grant to buy up houses in neighborhoods like North Minneapolis and to reinvest in neighborhoods decimated by subprime lending. But Orfield says it’s going to take a lot more than a few million to take care of the problem. For one thing, there are nearly 900 abandoned properties. For another, the problem is widespread and systemic and requires real leadership to enact change and create more mixed-use housing.

Orfield says Minneapolis Mayor R.T. Rybak and city planners need to start considering creative and forward-thinking solutions, not short-term Band-Aids. If Minneapolis wants to survive the crisis, he says, it needs to start applying the Federal Fair Housing Act in its decisions to reinvest in communities. “If [the] Federal Fair Housing Act were really applied, you’d have more of these family units built in suburban areas, too. But we don’t see that,” he says. “And instead it’s getting worse.”

At a House Financial Services Committee hearing on Thursday, Bachmann forwarded a conservative talking point designed to scapegoat the Community Reinvestment Act (CRA), a law that compelled certain financial institutions to ensure that every creditworthy American has an equal opportunity to secure a mortgage, as the major cause of subprime lending. It’s a talking point critics say Bachmann might have wanted to investigate further before putting it into the congressional record.

Because of CRA, Bachmann said, “[President Bill Clinton] turned the two quasi-private, mortgage-funding firms into a semi-nationalized monopoly that dispensed cash to markets, made loans to large Democrat [sic] voting blocs and handed favors, jobs and money to political allies. This potential mix led inevitably to corruption and the Fannie-Freddie collapse.”

“Loans started being made on the basis of race, and often little else,” she said.

For decades the banking industry openly “redlined” minority neighborhoods by refusing to generate mortgages while members of those neighborhoods were intentionally kept out of white neighborhoods. There was virtually little chance that people of color could gain credit. CRA was passed to fix that. But even with government intervention, minority communities still face discrimination in lending.

Bachmann, a Republican who represents Minnesota’s 6th District, drew the ire of Ellison, the Minneapolis Democrat and fellow Financial Services Committee member, whose office said the representative was greatly disappointed by Bachmann’s comments. In committee, he said:

I personally am not going to just sit by and let people trash programs that helped folks get into housing who have been struggling to get in. Fannie and Freddie — I don’t think are failed models. CRA certainly isn’t a failed program. These are important and good programs and should be protected. And if you want to find blame somewhere, let’s look at Gramm-Leach-Bliley. Let’s look at the very deregulation that so many people called for and clamor for and now we see what deregulation, lack of corporate responsibility put together with flat declining wages for the American people will bring about. It’s brought about this.

Bachmann’s statements also spurred Ellison to send a letter to House Minority Leader John Boehner, signed by many members of the Congressional Black Caucus, condemning her statements. The letter read, in part:

We write as members of the Congressional Black Caucus asking that you clarify your caucus position on minority lending being the cause of the current financial crisis … There is no evidence to support Rep. Bachmann’s assertion that “minorities” caused the current financial crisis. Laws designed to open opportunities for equal access to credit does not require banks or thrifts to make loans that are unsafe or unprofitable. In fact, laws like the CRA mandate exactly the opposite. The law stipulates that CRA lending activities must be done consistent with safe and sound banking practices. Additionally, research clearly shows that the majority of the predatory loans that have led us to this financial mess were originated by non-bank financial institutions and other entities that did NOT have a CRA obligation and lacked strong federal regulatory oversight. Shifting the blame for the current economic crisis to laws that allow equal access and opportunity to communities of color is ridiculous.

Ellison and the CBC may be correct. The number of financial institutions involved in the proposed Wall Street bailout and subprime mortgage default-swapping that even applied for CRA credit is low. Of the big names, Bear-Stearns, AIG, CitiGroup, Washington Mutual, UBS of Switzerland and Nomura of Japan weren’t subject to CRA regulations. In addition, as the economics of the housing market shifted, many of the subprime loans generated were made by mortgage brokers who are not subject to CRA.

Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee on which both Bachmann and Ellison sit, penned a letter to the Star Tribune directly countering Bachmann’s talking points:

Bachmann … incorrectly points to the Community Reinvestment Act as a source of our current problems. CRA, originally passed in 1977, does not require banks or thrifts to make loans that are unsafe or unprofitable. In fact, federal law requires that CRA lending activities must be done consistent with safe and sound banking practices. In reality, most high-cost loans were originated by lenders that did not have a CRA obligation and lacked federal oversight.

Predictably, her opponent, DFL and Independence Party candidate El Tinklenberg, seized on Bachmann’s ill-informed talking points:

[O]n the floor of the U.S. House of Representatives, Rep. Michele Bachmann revealed herself to be the worst kind of partisan. Comments like hers only fuel the divisiveness that dominates our political life. It would be morally and politically wrong to stand by and let these comments go unchallenged. More than ever now, I look forward to engaging her at Monday’s debate in Monticello. It’s time for Rep. Bachmann to answer to her constituents for her polarizing views.

The fracas over her statements put Bachmann on the defensive over the weekend. “It was an unfair characterization of my remarks,” she told the St. Cloud Times, referring to a Roll Call article about her statements. “I read a portion of an article critical of the Community Reinvestment Act, which I’m not a fan of. They were not my words.”

Bachmann was reading from an opinion piece by Terry Jones, an editor for Investor’s Business Daily, a financial newspaper geared toward executives and with a decidedly conservative bent.

“[CRA] may in the future inhibit ownership for minorities and communities of color,” she said. “It does not mean that I’m a racist … because I’m critical of that bill.”

Everyone with a soapbox has spent the better part of this week pointing fingers at who is to blame for the emerging economic crisis stemming from the default of millions of subprime mortgages. One direction that conservatives, Republicans and bankers are pointing their fingers is at the Community Reinvestment Act of 1977 (CRA) — a law created to counter the discriminatory practice mortgage banks used for decades to single out minority neighborhoods for subprime mortgages or otherwise deny credit-worthy individuals access to capital simply because of the color of their skin and their neighbors.

Rep. Michele Bachmann slammed CRA in an appearance on Larry King Live on Monday night. “Look at the housing crisis. Government has to take its share of the blame,” she said. “After all, the government was goading these mortgage lenders, saying, ‘You’re redlining. You’re being discriminatory. If you don’t give loans out to marginally credit-worthy people we’re going to come after you.’ In fact, Chairman Barney Frank has made comments like that as well.”

She continued, “The Democrat [sic] controlled Congress wants to have these mortgage lenders make loans to people with marginal credit. Well, guess what? If you aren’t making lending… it is not a shock when you have loans that aren’t paid back.”

Bachmann sits on the House Financial Services Committee with fellow Minnesota Rep. Keith Ellison. And Ellison is not amused by that type of rhetoric.

“This is the height of chutzpah,” said Rep. Keith Ellison in a scathing statement on Tuesday. “To suggest that the greatest financial crisis we face since the Great Depression was caused by legislation that was created to help PREVENT low-income individuals from assuming high-cost, subprime loans that have caused the crisis today is absurd.”

“To suggest that struggling families trying to keep their homes brought down the ‘Titans of Commerce,’ ‘The Masters of the Universe’ on Wall Street, is ludicrous. To suggest someone who is raising three children while holding down two minimum-wage jobs on a high school education was able to stall one of the greatest economic engines on earth needs their head examined,” Ellison said.

And empirical data back Ellison’s assertion. A number of studies show that CRA has in fact decreased predatory lending in minority neighborhoods and that banks subject to CRA regulations were less likely to offer subprime loans.

The New York law firm of Traiger and Hinckley analyzed subprime loan data in the 15 largest metropolitan areas (PDF). Only 25 percent of lenders in low- to moderate-income neighborhoods were under the purview of CRA, because many of the newer lenders fell outside of the scope of regulation. The CRA banks, however, were significantly less likely to offer subprime loans, offered lower rates and had fewer foreclosures on their books.

“Our study suggests that without the CRA, the subprime crisis and related spike in foreclosures might have negatively impacted even more borrowers and neighborhoods,” the report said.

And while critics contend that CRA costs banks, other contend that once lenders move into underserved neighborhoods, profit can be made. Ellen Seidman of the New America Foundation’s Financial Services and Education Project told Comgress, “Once these initiatives were started, many have proven to be sustainable in purely financial terms.”

Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco, told Congress in April:

“There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term.”

Interestingly, in 2005, just as the the explosion in subprime loans hit underserved neighborhoods, the Bush administration under pressure from banks changed the rules so that only banks with $1 billion in assets would be subject to CRA. The law was essentially gutted.

Robert Gordon of the American Prospect has traced the roots of the “blame CRA” meme back to Ron Paul supporters and crackpot conservative message boards, then to the conservative Washington Times and finally to Bachmann and other prominent conservatives. Talking Points Memo put together this video of conservatives blaming minorities for the housing collapse.

“Irresponsible and unregulated free-market lending run amok got us into this fix today,” Ellison said Tuesday. “Executive salaries the size of Third World economies, coupled with enormous compensation packages, epitomizes the laissez faire policies of the past eight years under George W. Bush. We are living a textbook example of a free and unfettered market failure. It is a crisis that can only be addressed by government oversight and regulation.”