IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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

  • Neil Bhutta
Registered author(s):

    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.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.federalreserve.gov/pubs/feds/2008/200861/200861abs.html
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/feds/2008/200861/200861pap.pdf
    Download Restriction: no

    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.

    as
    in new window

    Length:
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:fip:fedgfe:2008-61
    Contact details of provider: Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551
    Web page: http://www.federalreserve.gov/

    More information through EDIRC

    Order Information: Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. 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.
    2. 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.
    3. Bostic Raphael & Paulson Anna L & Mehran Hamid & Saidenberg Marc, 2005. "Regulatory Incentives and Consolidation: The Case of Commercial Bank Mergers and the Community Reinvestment Act," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-27, April.
    4. Michael H. Schill & Susan M. Wachter, 1994. "Borrower and neighborhood racial and income characteristics and financial institution mortgage application screening," Proceedings, Federal Reserve Bank of Philadelphia, pages 223-243.
    5. Drew Dahl & Douglas D. Evanoff & Michael F. Spivey, 2009. "Community Reinvestment Act Enforcement and Targeted Mortgage Lending," Working Papers 200806, Utah State University, Department of Economics and Finance.
    6. LaCour-Little, Michael & Malpezzi, Stephen, 2003. "Appraisal Quality and Residential Mortgage Default: Evidence from Alaska," The Journal of Real Estate Finance and Economics, Springer, vol. 27(2), pages 211-33, September.
    7. Robert B. Avery & Kenneth P. Brevoort & Glenn B. Canner, 2007. "Opportunities and Issues in Using HMDA Data," Journal of Real Estate Research, American Real Estate Society, vol. 29(4), pages 351-380.
    8. Millon Cornett, Marcia & De, Sankar, 1991. "Medium of Payment in Corporate Acquisitions: Evidence from Interstate Bank Mergers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(4), pages 767-76, November.
    9. Kenneth A. Carow & Edward J. Kane, 2001. "Event-Study Evidence of the Value of Relaxing Longstanding Regulatory Restraints on Banks, 1970-2000," NBER Working Papers 8594, National Bureau of Economic Research, Inc.
    10. Robert B. Avery & Raphael W. Bostic & Glenn B. Canner, 2000. "CRA special lending programs," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 711-731.
    11. Jeffrey M. Lacker, 1995. "Neighborhoods and banking," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 13-38.
    12. Joseph Nichols & Anthony Pennington-Cross & Anthony Yezer, 2004. "Borrower Self-Selection, Underwriting Costs, and Subprime Mortgage Credit Supply," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 197-219, November.
    13. James T. Campen & Thomas M. Callahan, 2001. "Boston's soft second program: reaching low-income and minority home buyers in a changing financial-services environment," Proceedings 796, Federal Reserve Bank of Chicago.
    14. 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.
    15. Douglas D. Evanoff & Lewis M. Segal, 1996. "CRA and fair lending regulations: resulting trends in mortgage lending," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 19-46.
    16. Lang William W. & Nakamura Leonard I., 1993. "A Model of Redlining," Journal of Urban Economics, Elsevier, vol. 33(2), pages 223-234, March.
    17. Imbens, Guido W. & Lemieux, Thomas, 2008. "Regression discontinuity designs: A guide to practice," Journal of Econometrics, Elsevier, vol. 142(2), pages 615-635, February.
    18. Caplin, A. & Leahy, J., 1993. "Miracle on Sixth Avenue: Information Externalities and Search," Harvard Institute of Economic Research Working Papers 1665, Harvard - Institute of Economic Research.
    19. Robert B. Avery & Paul S. Calem & Glenn B. Canner, 2003. "The effects of the Community Reinvestment Act on local communities," Proceedings 878, Federal Reserve Bank of Chicago.
    20. repec:fip:fedgsq:y:2007:i:mar30 is not listed on IDEAS
    21. Dennis R. Capozza & Ryan D. Israelsen & Thomas A. Thomson, 2005. "Appraisal, Agency and Atypicality: Evidence from Manufactured Homes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(3), pages 509-537, 09.
    22. Ben S. Bernanke, 2007. "The Community Reinvestment Act: its evolution and new challenges," Speech 272, Board of Governors of the Federal Reserve System (U.S.).
    23. 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.
    24. Drew Dahl & Douglas D. Evanoff & Michael F. Spivey, 2002. "Community Reinvestment Act Enforcement and Changes in Targeted Lending," International Regional Science Review, , vol. 25(3), pages 307-322, July.
    25. Harrison, David M., 2001. "The Importance of Lender Heterogeneity in Mortgage Lending," Journal of Urban Economics, Elsevier, vol. 49(2), pages 285-309, March.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2008-61. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.