44 Pages Posted: 8 Nov 2012 Last revised: 8 Jan 2015
Date Written: October 1, 2012
Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.
Keywords: CRA, Financial Institutions, Mortgages, Financial Crisis, Household Finance
JEL Classification: G21, G28
Suggested Citation: Suggested Citation
Agarwal, Sumit and Benmelech, Efraim and Bergman, Nittai and Seru, Amit, Did the Community Reinvestment Act (CRA) Lead to Risky Lending? (October 1, 2012). Kreisman Working Papers Series in Housing Law and Policy No. 8. Available at SSRN: https://ssrn.com/abstract=2172549 or http://dx.doi.org/10.2139/ssrn.2172549