Community Reinvestment Act
The Community Reinvestment Act (CRA) has been critical to the expansion of responsible credit for low- and moderate-income borrowers since its passage in 1977. Designed to address low levels of lending activity in low- and moderate-income neighborhoods, it has helped spur a growing range of successful affordable loan programs that reduce credit access barriers. CRA expands the overall efficiency of the banking system by incentivizing banks to tap profit opportunities in underserved markets.
The Community Reinvestment Act ensures that banks make resources available to low-income or otherwise disadvantaged communities by offering “equal access to lending, investment and services to all those in an institution's geographic assessment area-at least three to five miles from each branch. In the case of large banks with many branches, the geographic area may encompass an entire county or even a state.” This policy was created as a direct response to “redlining”, a discriminatory practice used by bankers to avoid making loans to people of color or lower-income areas.
Cry Wolf Quotes
One cannot say with any certainty whether the more important cause of the current housing crisis was affordable-housing mandates or the actions of investment banks and ratings agencies. There can be no doubt, however, that both contributed. With that in mind, the best way to make sure that we don’t repeat our mistakes is to examine — and change — both… If the Community Reinvestment Act must stay in force, then regulators should take loan performance, not just the number of loans made, into account. We have seen the dangers of too much money chasing risky borrowers.
In 1989, sympathetic members of Congress got the Home Mortgage Disclosure Act amended to force banks to collect racial data on mortgage applicants; this allowed various studies to be ginned up that seemed to validate the original accusation… bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class. A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities. It also let community activists intervene at yearly bank reviews, shaking the banks down for large pots of money.
The Community Reinvestment Act does not appear to have had any positive effect on lending to residents of LMI neighborhoods. In fact, it appears to have had a negative effect on CRA lenders and LMI residents alike… While both CRA- and non-CRA lenders have increased the number of loans to low-income borrowers, the financial soundness of CRA-covered institutions decreases the better they conform to the CRA.
The subprime mortgage market, which makes funds available to borrowers with impaired credit or little or no credit history, offers a good example of competition at work…To the contrary, it was lenders in the control group that refocused their efforts in line with the mid-1990s boom in lending in low-income neighborhoods. In fact, lending in low-income neighborhoods grew faster than other types of lending at institutions not covered by CRA, whereas low-income lending grew at the same rate as other types of lending activity for CRA-covered lenders. As a group, lenders not covered by CRA devoted a growing proportion of their home-purchase lending to low-income communities, with the community lending share of their loan portfolios rising from 11 percent in 1993 to 14.3 percent in 1997. In contrast, CRA-covered lenders, as a group, devoted about the same proportion of their home-purchase loans to low-income neighborhoods in 1997 as they did in 1993. In both years, their community-lending share was about 11.5 percent. Even though those institutions were subject to CRA, their lending in low-income communities grew no faster than other lending. Those results would not be expected if CRA were the impetus for increases in lending in low-income neighborhoods. The data, however, are consistent with deregulation and technological advances leading to lower information costs and increased competition in the mortgage market. Independent mortgage companies tend to have more leeway to specialize in relatively risky lending than their more conservative and more heavily regulated counterparts in the banking industry. It is not surprising, then, that independent companies took the lead in focusing on lending activity in the riskier segments of the mortgage market… The inescapable conclusion is that progress predicated on technology, financial innovation, and competition—not CRA—has broadened the U.S. financial services marketplace.
Evidence
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Federal Reserve Bank of San Francisco Shuts Down Critics of the Community Reinvestment Act
The Community Reinvestment Act had nothing to do with the subprime crisis.
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Community Reinvestment Act Did Not Fuel the Subprime Crisis
The Community Reinvestment Act did not create an overabundance of risky loans.
Backgrounders & Briefs
Good Rules: Ten Stories Of Successful Regulation
Demos looks at ten laws and rules that we take for granted.
Community Reinvestment Act Policy Brief
By Philip Ashton, UIC
The Community Reinvestment Act (CRA) has been critical to the expansion of responsible credit for low- and moderate-income borrowers since its passage in 1977.
