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Does the Community Reinvestment Act (CRA) cause banks to provide a subsidy to some mortgage borrowers?

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Abstract

The Community Reinvestment Act (CRA) encourages lenders to make mortgage loans to certain classes of borrowers. However, the law does not apply to all lenders, and lenders do not necessarily receive credit for all loans made to borrowers of a particular class. We use this variation to test whether or not CRA-affected lenders cut interest rates to CRA-eligible borrowers; in other words, we test for the presence of a regulation-driven subsidy. Our theory suggests that loans made by commercial banks and savings associations (``relationship lenders'') and mortgage companies (``transaction lenders'') will differ from one another depending on borrower risk and homeownership benefits. Empirically, we find that CRA-eligible loans at CRA-affected institutions do carry lower mortgage spreads compared with other loans at the same institution. However, once we control for risk and benefit effects suggested by our theory, these differences in mortgage spreads become economically and statistically insignificant.

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  • Glenn B. Canner & Elizabeth Laderman & Andreas Lehnert & Wayne Passmore, 2002. "Does the Community Reinvestment Act (CRA) cause banks to provide a subsidy to some mortgage borrowers?," Finance and Economics Discussion Series 2002-19, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2002-19
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    1. Ozgur Emre Ergungor, 2010. "Bank Branch Presence and Access to Credit in Low‐ to Moderate‐Income Neighborhoods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1321-1349, October.
    2. Saadi, Vahid, 2019. "Mortgage supply and the US housing boom: The role of the Community Reinvestment Act," SAFE Working Paper Series 155, Leibniz Institute for Financial Research SAFE, revised 2019.
    3. Saadi, Vahid, 2016. "Mortgage supply and the US housing boom: The role of the community reinvestment act," IWH Discussion Papers 32/2016, Halle Institute for Economic Research (IWH).
    4. Stuart A. Gabriel & Stuart S. Rosenthal, 2006. "Secondary Mortgage Markets and Access to Credit: 1992-2002," Working Paper 8569, USC Lusk Center for Real Estate.
    5. AKM Rezaul Hossain, 2004. "The Past, Present and Future of Community Reinvestment Act (CRA): A Historical Perspective," Working papers 2004-30, University of Connecticut, Department of Economics.
    6. Richard J. Buttimer, 2011. "The financial crisis: imperfect markets and imperfect regulation," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 3(1), pages 12-32, April.
    7. Ms. Evridiki Tsounta, 2011. "Home Sweet Home: Government's Role in Reaching the American Dream," IMF Working Papers 2011/191, International Monetary Fund.

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