Do CRA Agreements Influence Lending Patterns?

Lenders have increasingly responded to regulatory and public pressures to provide credit to lower-income and minority communities by entering into CRA agreements, which typically involve pledges to extend a certain volume of lending to targeted groups and communities. This paper considers the broader impact of these CRA agreements by examining whether they are associated with changes in lending to lower-income and minority communities in the markets where they are initiated. Using a speciallyconstructed panel of counties that includes information on CRA agreements provided by the National Community Reinvestment Coalition, we find the number of newly-initiated CRA agreements in a county to be associated with significant increases in CRA, minority, and overall conventional mortgage lending in a county over a 3-year period. The results are consistent with the view that the increases in lending represent new lending, with some evidence suggesting the increases in lending are relatively short-lived. No comparable relationships are observed between CRA agreements and changes in government-backed lending. Overall, the results are consistent with the notion that lenders view CRA agreements as a form of insurance against the potentially large and unknown costs associated with fair lending violations, poor CRA performance ratings, and adverse publicity from CRA-related protests of mergers or other applications. The results are also consistent with the view that the effectiveness of CRA agreements in increasing lending activity is ultimately determined by the persistence and sophistication of community groups in monitoring compliance with CRA agreements.