Did the Community Reinvestment Act (CRA) Lead to Risky Lending?

44 Pages Posted: 8 Nov 2012 Last revised: 8 Jan 2015

Sumit Agarwal

Georgetown University - Department of Finance

Efraim Benmelech

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Nittai Bergman

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Amit Seru

Stanford University

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2012

Abstract

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

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

Sumit Agarwal (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Efraim Benmelech

Northwestern University - Kellogg School of Management ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nittai Bergman

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 Memorial Drive
Cambridge, MA 02142
United States
617-253-2933 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amit Seru

Stanford University ( email )

650 Knight Management
Stanford, CA 94305
United States

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