How Disparate Impact...AND “Affirmative Action in Lending” Caused the Housing Crash and the Global Credit Crisis

Throughout the 1970s Housing activists like Dale Rathke (co-founder of ACORN and the SEIU) and Gale Cincotta were able to shake down banks with bank lobby sit-ins, forcing them to offer millions of dollars in loans to “low income Americans,” another term for high-risk borrowers. Those early successes only emboldened these advocates for “marginal America.”

They found eager friends in the likes of naïve and die-hard liberals such as Ted Kennedy (D-MA) and William Proxmire (D-WI). Gale Cincotta was a devout opponent of the very necessary practice of redlining, where banks charged higher rates and higher fees for mortgages in areas where the default rate was higher.

Activists like Cincotta and Rathke and others claimed that such practices not only made it difficult for people to own homes in such areas, they kept businesses from opening in such areas due to the higher costs and lower profitability.

Business is the ONLY real force for GOOD in a free society. That’s right BUSINESS is the ONLY force for good in a FREE SOCIETY.

By solely focusing on making money for their shareholders (owners), businesses seek to help those who CAN and WILL pay to have their problems solved.

Those who CANNOT and WILL NOT pay need not darken their doorsteps. Such chronically poor people DON’T need access to wealth and capital, they NEED to get their lives in order by developing the skills they need to compete and earn a living!

Banks, like any other business are in business SOLELY to make money. They exist for NO other purpose. They do the most social good by delivering the highest profits to their shareholders/owners.

That’s why banks assiduously held to conventional or “traditional” mortgage lending guidelines or parameters, UNTIL forced to abandon them by a series of government law suits.

What were those traditional parameters? Why the same ones being applied to most loan applicants today; 20% down, no more than 2½X your income in mortgage debt and your monthly mortgage payment could NOT be more than 28% of the monthly net of the person/persons (limited to TWO for a residential mortgage) on the mortgage documents is the traditional lending criteria.

And yes, while it’s true that under those criteria, there were wide disparities in the rates at which various ethnic groups were able to meet the lending criteria, there was NOTHING at all “UNFAIR” about those traditional lending criteria, DESPITE whatever disparate or disproportionate impact they may have had. The SAME standards were indeed applied to all.

Anti-Capitalists/anti-Americans like Cincotta and Rathke, with the aid of allies like William Proxmire, they were able to turn what should've been harmless studies, that showed, for instance that banks in Brooklyn, NY invested only 11% of their capital in Brooklyn and that “blacks with similar incomes were far more often turned down for mortgages than whites.”

William Proxmire had no background and less understanding about how the financial services sector worked, which means he didn’t know that banks investing nearly 90% of their assets away from their local areas, was done SOLELY to generate higher profits for their shareholders/owners, which made those banks not only more profitable, but more viable.

And as Steven Malanga of the Manhattan Institute adroitly noted, “the banks protested that such studies did not take into account the creditworthiness of these applicants (ie, credit histories, existing debt to income ratio, the loan to value (of the property) ratio of the desired loan, etc.) which was far more important than income.”

By 1979 this anti-capitalist Axis was able to pass the Community Reinvestment Act, which even the NY Times assailed noting, “Our institutions are not social service organizations...” and added, “measures that would weaken (lending) standards are dangerous...New York’s savings banks already hold large numbers of defaulted mortgages, including many inner city properties...we raise a strong word of caution against the expectation that bank credit is a substitute for wages, salaries, and other income that is necessary to keep a community alive economically,” concluding, “It is hard to believe that anyone would argue that bad loans are good social investments.”

None-the-less, the CRA, which was only debated in one chamber of Congress (the Senate), and with very few legislators present, was passed. Senator Proxmire limited the visibility of the Bill by attaching it to the Housing and Community Development Act, which included the always popular block grants, which meant money to the Senator’s home states.

The CRA not only “gave the housing activists a seat at the table,” it enabled them to monitor every bank’s lending practices and block any mergers and acquisitions by reporting any complaints to specially set up departments within HUD and the DOJ.

By the mid-1980s Housing activists had developed their assaults on banks to an art form. Seattle’s rainier Bank was hit by a campaign organized by a bus driver named Keith Dublanica, who claimed that Rainier Banks lending policies “discriminated against minorities,” and the protesters demanded more “flexible terms” for specific groups of borrowers.

The Seattle Times reported that what Dublanica wanted was “a kind of affirmative action proposal in the making of loans.” And indeed that’s exactly what Keith Dublanica wanted, demanding that the banks offer a 2% discount on rates and waive fees for certain (predominantly minority) neighborhoods. As Dublanica put it, “If the racial mix is different from the rest of the city, perhaps the (lending) criteria should be somewhat relaxed.”

In fact, it’s the REVERSE. Poor credit risks SHOULD ALWAYS pay HIGHER RATES and HIGHER FEES to get loans, that’s the only way to limit default rates among that largely reckless and irresponsible group. In fact, EVERY high risk loan made to the poor directly HARMS working people who CAN afford conventional mortgages under traditional lending parameters. It harms them because the costs of those failures are placed on their backs when they apply for loans and they pay for the subsequent and necessary bailouts with higher taxes.

Ironically enough, the 1990s saw the Clinton administration borrow from the Conservative’s “Ownership Society” endorsed by the likes of Jack Kemp, G W Bush and Bob Dole, to replace public housing as the liberal Democrats’ top priority with an ownership agenda of their own.

As economist John H. Makin noted, "No longer would public housing be at the top of the liberal Democratic agenda...instead, borrowing from conservative ideas about the inestimable benefit of home ownership to the striving poor, the Clinton administration and members of his Party in the House and Senate decided to use government power to achieve that aim.”

Janet Reno (the AG) and Henry Cisneros (HUD Secretary) began suing banks which didn’t make enough loans to low-income Americans and the legal concept behind that screwball policy was yet another screwball concept called “disparate impact.”

Disparate Impact is a deliberate LIE and a SHAM. It seeks to label ANY standard that has a different/disproportionate impact on one group than another to be deliberately discriminatory against the negatively impacted group.

According to this fatally flawed concept, a bank might have policies that were fair and equally applied to all, but if the outcomes were different, the policy was deemed deliberately or objectively discriminatory. For instance, if a bank had a longstanding policy of not issuing mortgages on homes valued at less than $80,000, it could be considered guilty of discrimination because that policy would be determined to adversely and disproportionately impact the poor.

When Henry Cisneros left the Clinton administration in 1997 to accept a very lucrative appointment to the board of Countrywide Mortgage, his successor, Andrew Cuomo actually used the term “affirmative action” when defending the use of disparate impact to force banks to loosen their lending criteria.

At an April 6th, 1998 press conference, Andrew Cuomo said, “but for the affirmative action on the part of the banks, most of these recipients would not have qualified for conventional mortgages." Cuomo went on to acknowledge that the loans were at a “higher risk of default,” and the banks HAD TO “lower their standards on loan applications” to make those loans.

With that admission, Andrew Cuomo had chronicled the perverse and disastrous consequences of what was then two decades and would become three decades of government-coerced lending, via the concept of "disparate impact," to millions of non-creditworthy borrowers.

By 2008 over $4 TRILLION in high-risk, subprime loans were made, almost all of them bought by Fannie Mae and packaged by Freddie Mac into “mortgage backed securities” which were then sold to Wall Street and the rest of the world as highly safe and secure “AAA-rated bonds!”

In short, the entire housing collapse, the mortgage meltdown and the subsequent global credit crisis was caused by government’s adherence to the flawed and pernicious concept of “disparate impact” and its subsequent meddling in the mortgage market (almost solely by politicians with little or no understanding or experience in the financial services sector) in order to effect what Andrew Cuomo accurately called “affirmative action in lending,” or what numerous economists have called “credit socialism.”

Worse yet, subprime loans have not been outlawed, the CRA that’s been used to coerce banks to make TRILLIONS in high-risk, subprime debt has not been abolished, Credit Default Swaps and other murky forms of derivative trading have not been stopped. In short, the SAME policies that caused the current crisis, including many in Washington’s adherence TO and affection FOR the very flawed and pernicious concept of “disparate impact” have yet to be eliminated!

SEE Andrew Cuomo's April, 1996 Pres Conference lauding "affirmative action in lending"; http://www.youtube.com/watch?v=Lr1M1T2Y314&feature=PlayList&p=529CA6593D352484&playnext=1&playnext_from=PL&index=97