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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Giving credit where credit is due? the Community Reinvestment Act and mortgage lending in lower-income neighborhoods
Neil Bhutta
Abstract

I identify and quantify the mortgage supply effect of the Community Reinvestment Act (CRA), a law mandating that banks help provide credit in lower-income neighborhoods, by exploiting a discontinuity in the selection rule determining which census tracts CRA targets. Using a comprehensive source of micro data on MSA mortgage applications, I find that CRA affects bank lending primarily in large MSA's, where banks are most scrutinized. The analysis indicates that CRA's effect on bank originations was about 4% between 1994 and 1996, and expanded to 8% in 1997-2002, consistent with the timing of a reform strengthening CRA. I provide some evidence that marginal loans go to atypical, potentially higher-risk borrowers. The results also indicate net "crowd-in": lending to targeted tracts by unregulated institutions rises in post-reform years, in particular to those areas that have had relatively low home purchase volume in the recent past, consistent with a model of information externalities in credit markets. Finally, using changes in tract eligibility status following the release of Census 2000 data as an additional source of variation, I find that CRA increased bank lending to newly targeted tracts in large MSA's by 4-5% in 2004 and 2005.


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Neil Bhutta, Giving credit where credit is due? the Community Reinvestment Act and mortgage lending in lower-income neighborhoods, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2008-61, 2008.
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Keywords: Mortgage loans ; Community Reinvestment Act of 1977
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