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Giving credit where credit is due? the Community Reinvestment Act and mortgage lending in lower-income neighborhoods

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  • Neil Bhutta
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    Abstract

    I identify and quantify the mortgage supply effect of the Community Reinvestment Act (CRA), a law mandating that banks help provide credit in lower-income neighborhoods, by exploiting a discontinuity in the selection rule determining which census tracts CRA targets. Using a comprehensive source of micro data on MSA mortgage applications, I find that CRA affects bank lending primarily in large MSA's, where banks are most scrutinized. The analysis indicates that CRA's effect on bank originations was about 4% between 1994 and 1996, and expanded to 8% in 1997-2002, consistent with the timing of a reform strengthening CRA. I provide some evidence that marginal loans go to atypical, potentially higher-risk borrowers. The results also indicate net "crowd-in": lending to targeted tracts by unregulated institutions rises in post-reform years, in particular to those areas that have had relatively low home purchase volume in the recent past, consistent with a model of information externalities in credit markets. Finally, using changes in tract eligibility status following the release of Census 2000 data as an additional source of variation, I find that CRA increased bank lending to newly targeted tracts in large MSA's by 4-5% in 2004 and 2005.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-61.

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    Date of creation: 2008
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    Handle: RePEc:fip:fedgfe:2008-61

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    Keywords: Mortgage loans ; Community Reinvestment Act of 1977;

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    1. repec:fip:fedgsq:y:2007:i:mar30 is not listed on IDEAS
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    Cited by:
    1. Neil Bhutta, 2009. "Regression discontinuity estimates of the effects of the GSE act of 1992," Finance and Economics Discussion Series 2009-03, Board of Governors of the Federal Reserve System (U.S.).
    2. Tarr, David G., 2010. "The political, regulatory and market failures that caused the US financial crisis," Policy Research Working Paper Series 5324, The World Bank.

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