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

Posted: 21 Oct 2010 Last revised: 10 Oct 2011

See all articles by Neil Bhutta

Neil Bhutta

Board of Governors of the Federal Reserve System

Date Written: December 31, 2010

Abstract

This paper assesses the impact of the Community Reinvestment Act (CRA), a law mandating that banks help meet the credit needs of lower income borrowers and neighborhoods. To measure the law’s effect on lending to targeted groups since 1994, I take advantage of discontinuous targeting rules and abrupt changes in neighborhood target status. On average, the CRA appears to have had little impact, including during the mid 2000’s when lending to lower-income areas soared. I do find a significant effect during the late 1990’s and early 2000’s in large MSAs – when and where the CRA may have been most binding for banks. I take advantage of this episode to test how CRA-induced lending affects overall credit supply; that is lending by both regulated banks and unregulated nonbanks. 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.

Keywords: Community Reinvestment Act, regression discontinuity, low and moderate income, mortgage, information externality, homeownership

JEL Classification: G21, G28

Suggested Citation

Bhutta, Neil, The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods (December 31, 2010). Journal of Law and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1694762

Neil Bhutta (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

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