Credit Where it Counts: The Community Reinvestment Act and Its Critics

Abstract:     
Despite the depth and breadth of U.S. credit markets, low- and moderate-income communities and minority borrowers have not historically enjoyed full access to credit. The Community Reinvestment Act (CRA) was enacted in 1977 to help overcome barriers to credit that these groups faced. Scholars have long leveled numerous critiques against CRA as unnecessary, ineffectual, costly, and lawless. Many have argued that CRA should be eliminated. By contrast, I contend that market failures and discrimination justify governmental intervention and that CRA is a reasonable policy response to these problems. Using recent empirical evidence, I demonstrate that over the last decade CRA has enhanced access to credit for low-income, moderate-income, and minority borrowers at relatively low cost, consistent with the theory that CRA is helping to overcome market failures. I argue that the form of CRA's legal directive, more akin to a standard, is preferable to more rules-based approaches, on grounds of both efficiency and legitimacy. Comparing CRA to other credit market regulations and subsidies, I argue that CRA is a reasonably effective response to market failures and should not be abandoned. In sum, contrary to previous legal scholarship, I contend that CRA is justified, has resulted in progress, and should be retained.

Keywords: Banking, Financial Institutions, Law & Economics, Institutions & Development

JEL Classifications: D10, D60, G21, I38, K20, O16

Accepted Paper Series