When our current financial woes started, and everyone who did not have an interest in covering for the Democrats started pointing at the Community Reinvestment Act as the cause, those with an interest in maintaining Democrat innocence, or with an interest in perpetuating the idiocy of the CRA, started looking for an excuse. Some took the path of least resistance and just denied any role on the part of the CRA, casting vague accusations of "Wall Street greed" and hoping no one noticed that Wall Street has been greedy forever, but the housing bubble and subsequent crash only existed since Clinton started pushing incredibly lax lending standards for poor borrowers. Other, showing a bit more creativity, started pointing to "microloan" programs in various nations, arguing that since microloans succeeded and did no economic harm, clearly the CRA could not be to blame for our current problems.

There are only two problems with their theory. First, the type of loans granted differ greatly between the microloans and the CRA mortgages. Second, the method of oversight, including the approval and collection processes, are completely different. And both of those difference mean that their analogy, while perhaps persuasive to those who know nothing about microloans, or who do but don't think about this very deeply, is entirely false. Microloans and the CRA occupy two different universes.

To understand, let us look at the microloan programs. The one with which I am most familiar was focused primarily on lending to poor women in southeast Asia, but the other programs about which I have read all seem to follow the same pattern, so I don't think I will be too far off base if I use the program I know best as a model.

Initially the microloan program starts as a charitable undertaking by one or more people with some money to loan, however, after the initial start up capital, the program tends to become self-financing, and self-administering. So let us look at the mature program, as that is a better example than the early days when things are more centrally administered and approval is centered more on the wishes of the program creators.

The microloan program basically works as follows. A poor person, or anyone who cannot obtain traditional credit, decides he wants to start a new enterprise to support himself. It may require a loom, or a few cows, or some seeds, or some hand tools. Whatever he needs, it will take more money than he has. So, he approaches the microloan group. Usually this is made up of a committee of neighbors who have taken loans themselves. If the microloan program is new to the region, it may be made up of borrowers form other regions. Whatever the case, this committee of present and former borrowers listens to his plans and his requirements and then decides whether or not to grant the loan. They do not consider collateral, nor do they require traditional fees or down payments. However, unlike traditional lenders, they do consider factors such as the reputation of the borrower, as well as more conventional considerations such as the viability of his project and the likelihood he can repay. Some programs may also require him to attend some sort of classes or meetings, or to present periodic reports on his undertaking. It varies form program to program.

Once the loan is granted, microloans tend to function like a traditional loan, with periodic payments including interest. Granted, the interest is used to expand the scope of the program rather than pay salaries or dividends, but from the perspective of the borrower there is little difference. Or rather, there is little difference provided he does not default. Most of these microloan programs do differ from traditional lenders in that they do not use legal means to collect on delinquent debts. Instead, like the Old Charges of Freemasonry, or Locke's proposed constitution for the Carolina colonies, they use social persuasion in the place of legal relief in the case of monetary debts. Those same neighbors who approved his loan begin to apply pressure, pointing out how unpaid debts mean no one else can get a loan, escalating to more open shows of disdain or even informal ostracism. And, judging from the success of most microloan programs, this seems to work, as most about which I have read seem to be expanding pretty consistently.

Now let us look at loans as conceived by the Community Reinvestment Act.

A borrower, wanting to purchase a home, goes to a local lender. As the buyer is poor or meets other criteria, his income is not put through the standard verification process, nor is he required to provide the same down payment. Instead he is basically passed through a fast track, where his loan is granted based on much more lax criteria. Once the loan is granted, he is basically just another borrower. If he defaults he may get a few more chances than a traditional borrower, depending on the lender and the program under which he borrowed, but otherwise it is just like any other loan. If he defaults there is a foreclosure.

So, it is easy to see how these two programs differ and how poor an argument it is to compare the CRA to microloans.

First, because microloans are small loans intended to support productive enterprises which assist in paying off the loans. On the other hand, the CRA is intended exclusively to finance a residence which, by term,s of the loan, cannot be a rental, and thus generates no money, requiring repayment be made form some other source of income, a source which is often not verified, or, at best, very poorly verified, when the loan is granted.

Second, and even more importantly, the micorloan relies upon a close knit community. The microloan is granted by a community committee which relies upon knowledge of the character of the borrower. It then relies on the same tight knit community to apply pressure to ensure repayment. Without that community, there is simply no way the microloan could work. And that is precisely the case with the CRA. Loans are not granted by a community, but by a traditional lender, who often knows absolutely nothing about the borrower. At best, the lender may hold the borrower's bank accounts, but they still lack the sort of intimate knowledge the boards of the microloan organizations have. Similarly, the CRA does not rely on shame to enforce repayment. The mechanisms to force repayment are the same anonymous mechanisms used in traditional mortgages.

Ironically, there are analogous programs to the microloan program in US, even some centered on home ownership. I met a man in 1990 who started one in Baltimore. Basically, they would provide the money to purchase a home needing renovations, and then the new owner, with assistance from those who had previously purchased homes, would renovate it. They would then be expected to provide labor for a few future homes as well. In this way, they were made both part of a community, which would help pressure them into repayment, and make them interested in their home, as they had invested some effort into it. This differs greatly from the CRA, where purchases are anonymous and the owners can easily walk away from a loan with no regrets. (Do I even need to mention the most important difference, that this is a private activity rather than a government mandated and financed program like the CRA?)

But such programs are nothing like the CRA, and neither are microloans. I have written elsewhere, over and over, how the Community Reinvestment Act led to this crisis we now face, so I won't go into that here. All I will say in closing is, no matter how creative the defenders of the CRA may become, no matter how many dubious analogies they find, such as the one to the microloan programs, the truth is, without the CRA we would not be facing the problems we now are.