Community Reinvestment Research Articles

"Revitalize or Stabilize": Does Community Development Financing Work?

Banks in the United States originate $100 billion in community development loans every year and hold a similar amount of community development investments on their balance sheets. A number of federal place-based policies encourage the provision of these loans and investments to promote growth, employment and the availability of affordable housing to disadvantaged communities. Research into the effectiveness of privately supplied community development financing has been hampered, however, by the lack of comprehensive data on banks' community development activities at a local level. Hand collected data from thousands of Community Reinvestment Act performance evaluations fill this gap. Using these data, the effect of the supply of community development funding on local economic outcomes is estimated. Endogeneity of community development financing to local demand factors is addressed, exploiting the fact that banks exhibit fixed tendencies to engage in community development financing across markets. Shifts in the share of local deposit markets toward banks with a greater tendency to supply community development loans are associated with subsequent expansion in total employment and wages paid. Estimates suggest $56,000 in community development lending is required to create one job, on net. There is no measurable effect on the supply of affordable housing or the growth of house prices. Counties experiencing a shift in local deposit market shares toward community development intensive banks were on similar pre-trends as the rest of the country in the years prior to the shift, as measured across a range of economic and credit market outcomes.

Role of the Community Reinvestment Act in Mortgage Supply and the U.S. Housing Boom

Abstract This paper studies the role of the Community Reinvestment Act (CRA) in the U.S. housing boom-bust cycle. I find that enhanced CRA enforcement in 1998 increased the growth rate of mortgage lending by CRA-regulated banks to CRA-eligible census tracts. I show that during the boom period house price growth was higher in the eligible census tracts because of the shift in mortgage supply of regulated banks. Consequently, these census tracts experienced a worse housing bust. I find that CRA-induced mortgages were awarded to borrowers with lower FICO scores and were more frequently delinquent.

Justice Reinvestment: Vision and Practice

Justice reinvestment was introduced in the early 2000s as a means to respond to the massive growth in incarceration in the United States that had occurred during the past three decades by diverting offenders from prison and redirecting a portion of the associated corrections expenditures into communities to build their capacities to manage offenders locally. Over the next 17 years, the concept evolved into a Congressionally funded federal grant program that shifted the focus of reinvestment away from community reinvestment and toward a state-agency practice improvement model that ultimately aimed to improve public safety. A distinct form of justice reinvestment, the Justice Reinvestment Initiative (JRI), was the dominant practice of justice reinvestment in the United States. It was organized as a public–private partnership that engaged states in bipartisan efforts to enact legislative reforms and other policies to address sentencing and corrections practices and adopt high-performing evidence-based practices (EBPs) that would yield the desired public safety benefits. JRI contributed to legislative reforms and adoption of EBPs, especially in community supervision. The federal JRI effort has not yet provided peer-reviewed, published evidence that it has achieved its objectives.

The Past, Present, and Future of the Community Reinvestment Act

The Community Reinvestment Act (CRA), enacted in 1977 and the subject of this special issue of Housing Policy Debate, was part of a trilogy of laws in the late 1970s including the Equal Credit Oppo...

The Impact of Peer-to-Peer Lending on Small Business Loans

We investigate the impact of peer-to-peer lending on the small business loans originated by US depository institutions that are subject to the Community Reinvestment Act. We present a model where a borrower can choose between a traditional bank and a crowdlending platform and show that the entry of crowdlending can induce a switching effect as well as a credit expansion effect. Using the staggered entry of LendingClub across states between 2009 and 2017, we find that the platform entry reduced the small business loans originated by banks, in particular, in the low- or moderate-income tracts as well as in the distressed middle-income tracts with a high poverty rate. A conservative estimate suggests that the crowdlending entry may have reduced the aggregate lending volume to small businesses.

The Weight of Compliance: Anti-Money Laundering Enforcement, Bank Composition, and Lending

We exploit a tightening of anti-money laundering (AML) enforcement that imposed disproportionate costs on small banks to examine the effects of a change in bank composition towards larger banks on real economic outcomes. In response to intensified AML enforcement at the end of 2012, counties prone to high levels of criminal activity in the form of money laundering experience a withdrawal of small banks and increased activity by large banks. This change in bank composition results in an increase in the number of small establishments and real estate prices. Wages and employment increase in the non-tradable sector, consistent with a household demand channel. Increased secured lending through mortgages is one potential driver of this result, whereas lending through the Community Reinvestment Act (CRA) and the Small Business Administration (SBA) are not.

Who Lends Beyond the Red Line? The Community Reinvestment Act and the Legacy of Redlining

ABSTRACTRedlining occurs when financial institutions refuse to serve particular neighborhoods, often based on their racial and ethnic composition. Maps like those infamously created by the New Deal’s Home Owners’ Loan Corporation in the Great Depression rated and color-coded neighborhoods, assigning red to those considered the greatest credit risk. The Community Reinvestment Act (CRA) was passed in 1977 to combat the legacy and practice of redlining. However, we find neighborhoods rated declining or hazardous in the 1930s are still associated with worse economic conditions eight decades later. Moreover, although we find evidence that CRA encourages local banks and thrifts to lend to lower income borrowers, we find no difference in the market share of CRA-regulated lenders in lower income neighborhoods. In fact, these institutions lag the market in historically redlined neighborhoods.

The Community Reinvestment Act (CRA) and Bank Branching Patterns

ABSTRACTThis article examines the relationship between the Community Reinvestment Act (CRA) and bank branching patterns, measured by the risk of branch closure and the net loss of branches at the neighborhood level, in the aftermath of the Great Recession. Between 2009 and 2017, there was a larger decline in the number of bank branches in lower income neighborhoods than in more affluent ones, raising concerns about access to mainstream financial services. Once we control for supply and demand factors that influence bank branching decisions, we find evidence that the CRA is associated with a lower risk of branch closure, and that the effects are stronger for neighborhoods with fewer branches, for larger banks, and for major metropolitan areas. The CRA also reduces the risk of net bank losses in lower income neighborhoods. The evidence from our analysis is consistent with the notion that the CRA helps banks meet the credit needs of underserved communities and populations by ensuring the continued presence of brick-and-mortar branches.

Bank adaptation to neighborhood change: Mortgage lending and the Community Reinvestment Act

ABSTRACT This research explores whether banks strategically leverage regulatory rules for the Community Reinvestment Act that fix a neighborhood's eligibility status over a decade based on a neighborhood's economic trajectory over that decade. Using 2004–2011 Home Mortgage Disclosure Act (HMDA) data, we find that banks approve loans more frequently in those neighborhoods that are most rapidly improving, and that this effect is stronger if the neighborhoods are CRA-eligible low- and moderate-income (LMI) tracts. We find the “moving up” CRA premium ranges in magnitude from a 2 to 13 percent reduction in the likelihood an application is not approved. These results suggest that banks learn which neighborhoods are most rapidly improving and funnel activity to those places to reduce default risk while complying with the fair lending regulation. The results imply a potential unanticipated consequence of the regulation is that it changes the distribution of resources within the target population.

The Community Reinvestment Act: What Do We Know, and What Do We Need to Know?

ABSTRACTThe Community Reinvestment Act (CRA) was enacted in 1977 to encourage depository institutions to meet the credit needs of their communities. In 2018, the Office of the Comptroller of the Currency put out an advance notice of proposed rulemaking to gather feedback on how the CRA could be modernized. The 1,485 comment letters make clear there is no consensus on what modernization means. We argue that any revision of the regulations would be more effective if it had strong grounding in facts about current CRA lending. Using 2016 Home Mortgage Disclosure Act data and 2016 Federal Financial Institutions Examination Council loan files, we assess what we know about CRA lending from existing data sources and what we could analyze if we had more data and increased transparency on the data that are already collected.

Quantitative Performance Metrics for the Community Reinvestment Act: How Much Reinvestment Is Enough?

ABSTRACTSince the passage of the Community Reinvestment Act (CRA) in 1977, regulators have grappled with the question of how best to evaluate a bank’s performance in meeting the credit needs of its communities. This article contributes to the debate on how to determine a bank’s CRA rating by presenting an analysis of which activities are currently reported as fulfilling a bank’s CRA obligation. Using data on mortgage, small business, and community development lending, investment, and service activities from performance evaluations (PEs) released in 2011 and 2016 for all banks in California, the article answers three questions. First, what are the inconsistencies in what is reported across PEs, and how do they complicate efforts to develop a single metric of CRA activities? Second, how do banks’ CRA-motivated loans and investments vary by markets and economic cycles? Third, to what extent are these loans and investments aligned with the intent of CRA? The results suggest that regulators should focus on reorienting the exam toward giving credit for the loans and investments that promote community development, rather than moving to a single metric based on dollar volumes that could incentivize banks to do less—or even worse, to do harm.

Is the Community Reinvestment Act Still Relevant to Mortgage Lending?

ABSTRACTThe market share of conforming-size, home purchase mortgage originations has shifted from banking institutions to nonbank lenders. In 2017, nonbanks originated more than 1.8 million purchase mortgages (53% of the market), compared with 1.4 million by banks. Nonbanks originated 30% of purchase-money mortgages in 2000 and 24% in 2007. Does the declining role of banking institutions imply that the Community Reinvestment Act (CRA) is becoming less relevant to mortgage lending, since only they are subject to the requirements of the CRA? We address this question by exploring the changing composition of home purchase mortgage originations since 2000. We focus on the share of FHA and conforming-sized conventional loans to low- or moderate-income (LMI) households or to finance properties in LMI neighborhoods, and provide a more detailed examination of shifts in market composition than previous studies. Our analysis suggests that the CRA continues to be relevant to maintaining broad access to mortgage credit. We find that the overall share of loans to LMI borrowers has decreased compared with pre-2004, which we view as a reasonable benchmark period. However, this decrease has mostly been offset by an increased share to borrowers (broadly distributed by income) purchasing properties in LMI neighborhoods.

Development Lending and the Community Reinvestment Act

These remarks, prepared for the Issues in Community Economic Development conference at Western New England College, provide a brief overview of the law and economics literature on urban economic development. I conclude with a set of principles for legislative reform.

Pathways to justice in the APY Lands: breaking the cycle of offending

ABSTRACT In 2017 the Australian Law Reform Commission released the Pathways to Justice report, an inquiry into the incarceration rate of Aboriginal and Torres Strait Islander peoples. The Commission found that ‘community reinvestment’ strategies were needed to redress the disproportionately high incarceration rates experienced by Indigenous people. Previous strategies involved attempts at pluralising the mainstream criminal justice system, such as by mandating the use of English language interpreters and Aboriginal Justice Officers. However, the example of the Anangu Pitjantjatjara Yankunytjatjara (APY) Lands demonstrates that these efforts have had limited success in curbing offending and resulting incarceration. The cultural alienation and physical dislocation of the mainstream criminal justice system from APY communities has perpetuated barriers to justice, as seen in the difficulty of accessing interpreters and the occurrence of convenience pleas. To best deliver justice, prevent recidivism and reduce incarceration in Indigenous communities, this article supports the central recommendation of the Pathways to Justice report that mainstream criminal justice resources be transferred into community-led programs.

Is the CRA Still Relevant to Mortgage Lending?

Market share of conforming-size, home purchase mortgage originations has steadily and substantially shifted from banking institutions to nonbank lenders over recent years. In 2017, nonbanks originated more than 1.8 million conventional and FHA purchase mortgages (53% of the market), as compared to 1.4 million by banks. In contrast, nonbanks originated 30% of purchase-money mortgages (by volume) in 2000 and 24% in 2007. Does the declining role of banking institutions imply that the Community Reinvestment Act (CRA) is becoming less relevant to mortgage lending, since only they are subject to the requirements of the CRA? We address this question by exploring the changing composition of home purchase mortgage originations since 2000. We focus on the share of FHA and conforming-sized conventional loans to low- or moderate income households or to finance properties in low- or moderate-income neighborhoods, and provide a more detailed examination of the shifts in market composition than previous studies. Our analysis points to a conclusion that the CRA continues to be relevant to maintaining broad access to mortgage credit. We find that the overall share of loans to low-or moderate-income borrowers has decreased compared to pre-2004, which we view as a reasonable benchmark period. However, this decrease has mostly been offset by an increased share to borrowers (broadly distributed by income) purchasing properties in low- or moderate-income neighborhoods.

Peer Pressure and Institutional Ecosystem of Social Value Creation: Community Reinvestment of Social Enterprises

Peer Pressure and Institutional Ecosystem of Social Value Creation: Community Reinvestment of Social Enterprises

Climate Adaptation Investment and the Community Reinvestment Act

This report introduces the field of climate adaptation finance and explains its connection to the Community Reinvestment Act (CRA) within the context of the disaster provisions guiding pre- and post-disaster investments. In a demonstration of need, the report provides evidence of the spatial concentration of disaster declarations in areas with CRA-eligible populations. It highlights existing innovative and hypothetical investments within a broader context for stimulating greater pre-disaster planning and investment.

The community reinvestment act and real municipal bond interest rate yields in the united states: evidence from the municipal bond market

This exploratory empirical study investigates the validity of a claim by the U.S. Office of the Comptroller of the Currency (2014) that The Community Reinvestment Act of 1977 may have acted to reduce the interest rate on high grade municipal bonds in the United States. The model also investigates the interest-rate effect of the federal budget deficit (as well as various other control variables). The estimates for the 1973–2016 study period reveal that The Community Reinvestment Act of 1977 may well have reduced the ex post real interest rate yield on high grade municipals.. The evidence also implies that the ex post real interest rate yield on high grade municipals has been an increasing function of the federal budget deficit (expressed as a percent of GDP). Federal public policy actions appear to exercise very important impacts on the market for municipal bonds.

Returns to Community Lending

For forty years, the Community Reinvestment Act (CRA) has encouraged U.S. banks to lend to lower-income neighborhoods. Regarding costs, to comply with CRA, banks substitute away from small-business lending to higher income groups and face higher default rates on loans made. Regarding benefits, a large number of Americans have been lifted out of poverty through the CRA small-business lending channel. New jobs in establishments and new entrepreneurships are equally strong mechanisms to alleviate poverty. The incidence of the act is on smaller banks who lend relatively more than larger banks. Taxpayers benefit from lower welfare expenses as poverty declines.

How do incentives influence local public support for the siting of shale gas projects in China?

In 2016, China became the third largest producer of shale gas in the world. The Chinese central government has been supporting shale gas development since 2011. There are hopes that shale gas development, along with major efforts in renewable energy systems, can bring a fundamental change in the nation’s current coal-dependent energy system. Numerous challenges have slowed implementation including resistance to development of the industry by local residents living near shale gas sites. A significant body of research has examined the effectiveness of incentives in changing risk perceptions and attitudes toward the siting of industrial projects in the Western context. The present research identifies whether governmental incentives increase the extent of local support for shale gas projects in the Chinese context. Specifically, this paper strives to study two types of incentives: direct compensation to households bearing the potential negative impacts of shale gas projects and, household compensation accompanied by allocation of a portion of the shale tax revenues to local communities where the development occurs. An online survey with an embedded experiment was designed and conducted in August 2016 in five Chinese provinces where there are current or future shale gas projects. The experiment shows that household compensation alone or in combination with community reinvestment significantly increases local support of shale gas projects. Further, we found that the respondents most likely to be supportive after the experimental treatments are those who are young, more highly educated, have higher income, and perceive themselves as living close to a project. This research sheds light on how incentives might help contribute to resolution of siting controversies or prevent the onset of such controversies.