“The unraveling of the U.S. economy began with the collapse of the subprime market. The subprime lending market provided a relatively new, untapped source of potential profits” (Watkins, 2011, p. 366).

“Although subprime mortgages accounted for less than 20 percent of all mortgages outstanding, just over half of these foreclosure initiations were on subprimes” (Gilbert 2011 p. 88). Naturally a review of the subprime lending meltdown would lead to the source of the risky banking behaviors and the government housing policies that created the loan availability.

Some “critics blamed the Community Reinvestment Act (CRA) for the current crisis in subprime lending and foreclosure” and availability of risky loans (Anacker & Crossney, 2013, p. 529). Others insist that it was the “behavior of the most profitable of the Wall Street Banks, [like] Goldman Sachs [that] engaged in ethically questionable activities that generated enormous profits.” (Watkins, 2011, p. 366).

Neither assessment of blame is entirely correct nor entirely wrong. “Sensemaking, however, is not a one-dimensional process, but requires careful scanning, interpreting, and analyzing of complex ethical dilemmas (Thiel et al., 2012, p. 59).

“[R]esearch indicates that subprime and foreclosed loans were primarily originated by independent mortgage companies (IMCs), also sometimes called nonbanks, which are lending institutions not covered by the CRA (Barr, 2008; Canner & Bhutta, 2008). Examples of IMCs are Countrywide, Ameriquest, New Century Financial Corporation, Option One, and Golden West” (Taylor, 2009)(Anacker & Crossney, 2013, p. 530). “Reviews of the Community Reinvestment Act generally agree that CRA induces banks to increase their lending activity in targeted neighborhoods” (Apgar and Duda 2003; Barr 2005; Haag 2000)(Spader & Quercia, 2012, p. 508).

Essentially, the CRA created the incentive to provide loans to low-income, high-risk borrowers otherwise avoided by conventional banking. This opened the door for IMCs to provide even riskier loans to low-income borrowers who could not qualify for the CRA regulated CAP loans. In turn, the big banks were attracted to subprime loans for the high fees that could come from frequent refinancing. It was not until years later that the risks were properly identified. Instead of broad corrective actions, banks created another systemic failure through credit default swaps trying to hedge risk and minimize financial damages. None of which turned out well.


Anacker, K. B. and Crossney, K. B. (2013). Analyzing CRA Lending During the Tsunami in Subprime Lending and Foreclosure in the Philadelphia MSA. Housing Studies, (28:4, pp. 529-552). DOI: 10.1080/02673037.2013.759181

Gilbert, J. (2011). Moral Duties in Business and Their Societal Impacts: The Case of the Subprime Lending Mess. Business and Society Review (116:1, pp. 87-107)

Spader, J. S. and Quercia, R. G. (2012). CRA Lending in a Changing Context: Evidence of Interaction with FHA and Subprime Originations. Journal of Real Estate Financial Economics (44, pp. 505-525). DOI: 10.1007/s11146-010-9247-2

Thiel, C.E., Bagdasarov, Z., Harkrider, L., Johnson, J. F., and Mumford, M.D. (2012). Leader Ethical Decision-Making in Organizations: Strategies for Sensemaking. Journal of Business Ethics (107, pp. 49-64). DOI: 10.1007/s10551-012-1299-1

Watkins, J. P. (2011). Banking Ethics and the Goldman Rule. Journal of Economic Issues (XLV:2, pp. 363-371). DOI: 10.2753/JEI0021-3624450213