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Community Reinvestment Act Enforcement and Targeted Mortgage Lending

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Significant disagreement exists as to whether the Community Reinvestment Act (CRA) influences the lending behavior of financial institutions. We conduct empirical tests on the lending of banks directly affected by regulatory enforcement of the CRA those experiencing upgrades or downgrades in their CRA ratings to evaluate whether the ratings changes were associated with lending behavior. Results indicate that: 1) upgraded banks had higher relative levels of lending than did downgraded banks, which is consistent with a hypothesis that banks adjust lending to satisfy CRA requirements; 2) downgraded banks show little evidence of increased lending following a downgrade despite apparent incentives for them to do so in an attempt to improve their CRA ratings; and 3) both downgraded and upgraded banks increased lending following implementation of new CRA regulations intended to more closely align CRA ratings with actual lending outcomes.

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  • Drew Dahl & Douglas D. Evanoff & Michael F. Spivey, 2009. "Community Reinvestment Act Enforcement and Targeted Mortgage Lending," Working Papers 200806, Utah State University, Department of Economics and Finance.
    • Handle: RePEc:uth:wpaper:200806
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    File URL: https://repec.bus.usu.edu/RePEc/uth/wpaper/DEFWP2008-06.pdf
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    Cited by:

    1. Neil Bhutta, 2011. "The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods," Journal of Law and Economics, University of Chicago Press, vol. 54(4), pages 953-983.
    2. Neil Bhutta, 2008. "Giving credit where credit is due? the Community Reinvestment Act and mortgage lending in lower-income neighborhoods," Finance and Economics Discussion Series 2008-61, Board of Governors of the Federal Reserve System (U.S.).

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