The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods
This paper evaluates the Community Reinvestment Act (CRA), a law mandating that banks help meet the credit needs of lower income households and neighborhoods. To measure the effect of the law on lending to targeted groups since 1994, I take advantage of discontinuous targeting rules and abrupt changes in target status. On average, the CRA appears to have had little impact on mortgage lending, even during the mid-2000s, when lending to lower income areas nevertheless soared. I do find a significant effect during the late 1990s and early 2000s in large metropolitan areas, when and where the CRA may have been most binding. I use this episode to test the effect of the CRA on overall mortgage availability--that is, lending by both regulated and unregulated institutions. The results are consistent with the notion that government intervention in credit markets may be justified on the grounds that information externalities exist and can depress credit supply.
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