The CRA and Subprime Lending in Neighborhoods: Myth or Reality?

Abstract

I examine the CRA’s impact on the approval rates of non-prime loans that consist of higher-priced subprime loans and loans guaranteed by the FHA. Although both loans are for riskier borrowers, subprime lending has been largely responsible for the mortgage crisis in the United States. I use loan approval and denial data during the subprime lending boom in 17 major metropolitan cities, recognizing the existing CRA regulations and research on assessment area and affiliate lending. The results indicate that CRA lenders, compared to non-CRA lenders, had disproportionately higher approval rates of subprime loans than FHA loans in majority of these cities. However, the approval rates of subprime loans by the two types of lenders did not differ for low- and moderate-income (LMI) communities and borrowers. Thus, the CRA may have played a role in proliferation of higher-priced subprime lending across communities, but not disproportionately in LMI communities - the areas receiving the most intense CRA scrutiny.

Keywords: CRA, FHA, seemingly unrelated regression, steering, subprime lending

JEL Classification: G21, G28, R21