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The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods

  • Neil Bhutta
Registered author(s):

    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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    File URL: http://dx.doi.org/10.1086/661938
    Download Restriction: Access to the online full text or PDF requires a subscription.

    File URL: http://dx.doi.org/10.1086/661938
    Download Restriction: Access to the online full text or PDF requires a subscription.

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    Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

    Volume (Year): 54 (2011)
    Issue (Month): 4 ()
    Pages: 953 - 983

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    Handle: RePEc:ucp:jlawec:doi:10.1086/661938
    Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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    1. Guido Imbens & Thomas Lemieux, 2007. "Regression Discontinuity Designs: A Guide to Practice," NBER Technical Working Papers 0337, National Bureau of Economic Research, Inc.
    2. Calem, Paul S, 1996. "Mortgage Credit Availability in Low- and Moderate-Income Minority Neighborhoods: Are Information Externalities Critical?," The Journal of Real Estate Finance and Economics, Springer, vol. 13(1), pages 71-89, July.
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    4. Robert L. Lacy & John R. Walter, 2002. "What can price theory say about the Community Reinvestment Act?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-27.
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    6. Daniel Aaronson, 1999. "A note on the benefits of homeownership," Working Paper Series WP-99-23, Federal Reserve Bank of Chicago.
    7. Raphael W. Bostic & Brian J. Surette, 2004. "Market Forces or CRA-induced Externalities: What Accounts for the Increase in Mortgage Lending to Lower-Income Communities?," Working Paper 8592, USC Lusk Center for Real Estate.
    8. Denice DiPasquale & Edward L. Glaeser, 1997. "Incentives and Social Capital: Are Homeowners Better Citizens?," Harvard Institute of Economic Research Working Papers 1815, Harvard - Institute of Economic Research.
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    10. Jeffery W. Gunther, 2002. "Safety and Soundness and the CRA: Is There a Conflict?," Economic Inquiry, Western Economic Association International, vol. 40(3), pages 470-484, July.
    11. Ling, David C. & Wachter, Susan M., 1998. "Information Externalities and Home Mortgage Underwriting," Journal of Urban Economics, Elsevier, vol. 44(3), pages 317-332, November.
    12. Paul S. Calem & Susan Wachter, 1998. "Community Reinvestment and Credit Risk: Evidence from an Affordable Home Loan Program," Zell/Lurie Center Working Papers 306, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
    13. Mark J. Garmaise & Tobias J. Moskowitz, 2006. "Bank Mergers and Crime: The Real and Social Effects of Credit Market Competition," Journal of Finance, American Finance Association, vol. 61(2), pages 495-538, 04.
    14. Blackburn, McKinley & Vermilyea, Todd, 2007. "The role of information externalities and scale economies in home mortgage lending decisions," Journal of Urban Economics, Elsevier, vol. 61(1), pages 71-85, January.
    15. Lei Ding & Roberto G. Quercia & Wei Li & Janneke Ratcliffe, 2011. "Risky Borrowers or Risky Mortgages Disaggregating Effects Using Propensity Score Models," Journal of Real Estate Research, American Real Estate Society, vol. 33(2), pages 245-278.
    16. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
    17. Caplin, Andrew & Leahy, John, 1998. "Miracle on Sixth Avenue: Information Externalities and Search," Economic Journal, Royal Economic Society, vol. 108(446), pages 60-74, January.
    18. Drew Dahl & Douglas D. Evanoff & Michael F. Spivey, 2002. "Community Reinvestment Act Enforcement and Changes in Targeted Lending," International Regional Science Review, SAGE Publishing, vol. 25(3), pages 307-322, July.
    19. Harrison, David M., 2001. "The Importance of Lender Heterogeneity in Mortgage Lending," Journal of Urban Economics, Elsevier, vol. 49(2), pages 285-309, March.
    20. Lang William W. & Nakamura Leonard I., 1993. "A Model of Redlining," Journal of Urban Economics, Elsevier, vol. 33(2), pages 223-234, March.
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