Did the Community Reinvestment Act (CRA) Lead to Risky Lending?

Social Science Research Network

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Date Published 2012
Primary Author Sumit Agarwal
Other Authors Efraim Benmelech, Nittai Bergman, Amit Seru
Theme Loan Origination, Servicing Foreclosure and Forbearance
Country United States


Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tractmonth that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

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