Mortgage Lending, Default and the Community Reinvestment Act
34 Pages Posted: 27 Mar 2015 Last revised: 11 Jan 2018
Date Written: December 14, 2017
The Community Reinvestment Act (CRA) encourages banks to lend to low and moderate income individuals. Following the subprime crisis, the CRA was accused of having promoted risky lending. This paper estimates the effect of the CRA on mortgage lending, exploiting variation in the set of banks whose lending performance is assessed in a given neighborhood due to the redefinitions of Metropolitan Statistical Areas in 2003. The CRA caused a substantial increase in mortgage lending, especially among low income borrowers. While income-conditional default risk was little changed, CRA-induced loans were riskier than average, due to their borrowers' lower incomes.
Keywords: Community Reinvestment Act, CRA, Subprime Crisis, Mortgage
JEL Classification: G21, G28
Suggested Citation: Suggested Citation