What Does the New Community Reinvestment Act (CRA) Paper Tell Us?
Dec 11, 2012
Mike Konczal


There are two major, critical questions that show up in the literature surrounding the 1977 Community Reinvestment Act (CRA).

The first question is how much compliance with the CRA changes the portfolio of lending institutions. Do they lend more often and to riskier people, or do they lend the same but put more effort into finding candidates? The second question is how much did the CRA lead to the expansion of subprime lending during the housing bubble. Did the CRA have a significant role in the financial crisis?

There’s a new paper on the CRA, Did the Community Reinvestment Act (CRA) Lead to Risky Lending?, by Agarwal, Benmelech, Bergman and Seru, h/t Tyler Cowen, with smart commentary already from Noah Smith. (This blog post will use the ungated October 2012 paper for quotes and analysis.) This is already being used as the basis for an “I told you so!” by the conservative press, which has tried to argue that the second question is most relevant. However, it is important to understand that this paper answers the first question, while, if anything, providing evidence against the conservative case for the second.

Where is the literature on these two questions? One starting point is the early 2009 research of two Federal Reserve economists, Neil Bhutta and Glenn B. Canner, also summarized in this Randy Kroszner speech. On the first question Kroszner summarizes research by the Federal Reserve, the latest being from 2000, arguing that “lending to lower-income individuals and communities has been nearly as profitable and performed similarly to other types of lending done by CRA-covered institutions.” The CRA didn’t cause changes to banks’ portfolios, but instead required them to find better opportunities. More on this in a minute.

What about the second question? Here the Bhutta/Canner research notes that only six percent of higher-priced loans (their proxy for subprime loans) were extended by CRA-covered lenders to lower-income borrowers or CRA neighborhoods. 94 percent of these loans were either made by non-traditional banks not covered by the CRA (the “shadow banking system”), or not counted towards CRA credits. As Kroszner noted, “the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.”

How did those loans do? Here the research compared the performance of subprime and alt-A loans in neighborhoods right above and right below the CRA’s income threshold, and found that there was no difference in how the loans performed. Hence the idea that a CRA-driven subprime bubble isn’t found in the data. (The FCIC’s final report, starting at page 219, has more on this and other research.)

So what does this new research do? It takes banks that were undergoing a normal examination to see if they were in compliance with the CRA, and thus under heightened regulatory scrunity, and compares their loan portfolios with banks that were not undergoing a CRA examination. It finds that the CRA exam increases loans 5 percent every quarter surrounding the event and those loans default 15 percent more often, under the idea that those banks were ramping up their loans to pass the CRA exam.

But this is question 1 territory. 94 percent of higher priced loans came outside CRA firms and outside CRA loans, and this research doesn’t really change that. Since we are talking about regular mortgages – more on that in a second – that higher default isn’t that scary. To put that in perspective, loans made in the quarter following the initiation of a CRA exam in a non-CRA tract are 8.3 percent more likely to be 90 days delinquent. That sounds scary, but it is an increase of 0.1, from 1.2 percent to 1.3 percent. In the CRA tract it is 33 percent more likely to default, going from 1.2 percent to 1.6 percent. FICO scores drop 7 points from 713.9 to 706.9. That’s an increase I wouldn’t want in my portfolio, but it is light-years away from 25%+ default rates, and very low FICO scores, on actual subprime.

This research, if anything, pushes against movement conservative CRA arguments. In light of the evidence in question 2, many conservatives argue that regulators used CRA to push down lending standards, which then impacted other firms. But this paper finds that extra loans aren’t more likely to have higher interest rates, lower loan-to-value, or be balloon/interest-only/jumbo/buy-down mortgages, although there is a slight increase in undocumented loans. And their borrowers aren’t more likely to have risky characteristics themselves. The authors conclude that “this pattern is consistent with banks’ strategic attempts to convince regulators that the loans they extend that meet CRA criteria are not overtly risky.”

Read that again. The authors argue, from their empirical evidence, that regulators were trying to make sure these loans had high standards, and CRA banks tried to comply with that as best they could on the major, visible risks of their loans. This is the opposite argument made by people like John Carney, who believes the CRA “encourag[ed] lenders to adopt loose standards for mortgages.” It also pushes against people like Peter Wallison, who, in his FCIC dissent, argued that CRA loans were more likely to have subprime characteristics or riskier borrowers in ways not captured by a higher-price variable. Not the case.

It also finds that loan volume and risk increases the most during 2004-2006, and points to the private securitization market as an important channel. This, along with characteristics above, pushes back against the idea that the CRA primed a subprime pump in the late 1990s and early 2000s, another favorite of movement conservative finance writers. If anything, banks undergoing CRA exams were caught up in the same mechanisms that were causing the housing bubble itself.

I’m not sure I buy all of the research. If CRA banks take on too many loans during examination, why wouldn’t they just loan less afterwards, balancing out? The paper jumps to argue the opposite, as it is worried that “adjustment costs may cause banks to keep elevated lending rates even after the CRA exam is formally completed.” This is meant to establish their results as a lower-bound, rather than an upper-bound. But really? They managed to ramp up their lending in enough time during this time. Either way it would throw a very different set of interpretations on their research. I’m interested in seeing how other researchers react to these problems. But for now these results don’t change the way we approach the financial crisis.


Originally published at the New New Deal

Category: Bailouts, Credit, Real Estate, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “What Does the New Community Reinvestment Act (CRA) Paper Tell Us?”

  1. Petey Wheatstraw says:

    That the CRA caused, or even significantly contributed to, the glut of bad loans that lead to the housing bubble and the subsequent economic crash is a very good example of a bad idea that won’t die.

    The fact is that this particular bad idea has been repeatedly and after many thorough examinations been correctly declared dead (Thanks again, BR). Repeated exhumations and reexaminations of the corpse are a waste of time and resources.

    I swear to the FSM I once saw my dearly departed uncle’s finger twitch as he was lying there in his casket at the funeral home. Although it’s been more than four decades since I witnessed this event, I believe that if we dig him up, I will be proven correct: Uncle Joe is still alive.

  2. flocktard says:

    I saw this paper flash by on my Twitter feed, and I thought, “Oh, crap, here we go again, and haven’t we put this to bed yet?”

    That’s why all of you should keep this link handy in your pocket, purse, glove compartment or emergency kit:


    Because you’ll never know when you need it.

    I don’t know who the authors are, but there are forces out there, including paid shills at the AEI and Heritage who will stop at nothing to blame this program- which on sheer loan volume alone, couldn’t cause a bubble- and deflect the blame from where it REALLY belongs: the “financial innovation” and “disciplined market forces” that Mr. Greenspan and his cohorts pushed.

    Barry’s point about foreclosure metrics is one that I have brought up often when debating the lunkheads who promote this lie. If you’re comparing foreclosure metrics to the performance of a conventional/conforming loan, even DOUBLING the default rate would have little material effect on the market. Especially in Henderson, Nevada.

    Again: This “Big Lie” is SO well entrenched in the public’s mind, thanks to endless appearances by slugs like Ed Pinto on conservative radio and Fox TV, dislodging it takes a lot of time, and the use of a ball peen hammer.

    It’s 2013- enough already.

  3. Oral Hazard says:

    And all the others whom you see down here
    Were sowers of scandal and schism while
    They lived, and for this they are rent in two.

    A devil goes in back here who dresses us
    So cruelly by trimming each one of the pack
    With the fine cutting edge of his sharp sword

    Whenever we come round this forlorn road:
    Because by then our old wounds have closed up
    Before we pass once more for the next blow.

    Inferno XXVIII

  4. DeDude says:


    This is a part of the right wing narrative of gobinment stealing from good hard working white christians and giving to un-deserving lazy minorities. This narrative has such a strong grip on the lower class white folks that no amount of facts will ever trump it. It is the main reason that GOP can get 45% of the population to vote against their own economic self interest.

  5. Greg0658 says:

    Petey watchg JamieD on CNBC (1/2 hour ago) .. and readg this page and thinkg bout my last post trade .. last nite had a desire to review scenes from “Margin Call” the Movie

    driving scene – “am I getting fired”
    best scene ? dont know about that – but good movie view of that world (I think)
    History of Capitalism “the music is about to stop .. excrement”
    Fat cats and starving dogs – “not because of your little speech .. I need the money”
    not in the Utube streams “I don’t hear a thing .. you know why I get paid the big bucks”

  6. whskyjack says:

    The CRA argument is just one indication that what passes for Conservatism these days is more religious based than fact based.
    For the modern Conservative the free market can never be to blame and government is always to blame. So when confronted with an obvious contradict to their beliefs they hunt around for a boogie man. And since there main boogie man is “big government” and their equally false belief that the masses will vote for bread and circuses. It is obvious to then anyway that the CRA has to be at fault.


  7. CharlesII says:

    Thanks for this post. I will add the mighty voice of Mercury Rising to publicizing it (providing credit to BP, of course).

    We like to think of ourselves as a free people. But how free are we if what most of us believe is a lie? –and a calculated and well-financed lie, at that.

    The campaign to blame a 1977 law for a 2008 crisis is one of the more hallucinogenic efforts I have witnessed in my lifetime.

  8. CharlesII says:

    Adding: The first step to take in make an argument regarding causation–before pulling out an econometric model–is: does the putative causal link make any f–king sense?

    As Noah Smith suggests, a thirty year gap between the alleged cause and the consequence should make one wonder whether other factors might be involved. I mean, the extinction of dinosaurs might have caused the Renaissance, but I don’t f–king think so.

  9. [...] entry by several NBER members and Sumit Agarwal on the mythology side, countered by Barry Ritholtz on the reality side: There are two major, critical questions that show up in the literature [...]

  10. EMichael says:

    I guarantee they are coming.

    They have new “evidence”.

    Wait for it.

  11. TacomaHighlands says:

    I wonder what the data looks like when only looking at new market tax credit projects? My limited understanding of these investments suggest even tougher lending standards. So conservatives can’t use this either.

  12. JasonPappas says:

    If, as you say “and their borrowers aren’t more likely to have risky characteristics themselves” why would CRA regulations be needed to encourage lending? This is especially true if the loans are going to be securitized and the investors will evaluate the collateral by the loan characteristics. Something is missing here.

  13. cheese says:

    Its not the demographics, its the products.

    The products designed by lenders to comply w/ the CRA migrated away from those participants the CRA was originally designed to help in order to help “middle-class” households afford the McMansion, and to feed the RMBS machine.

    It was the CRA’s success that incentivized bankers to use these products in markets for which they weren’t intended for. Why? Because they worked for the markets they were intended for.

  14. DeDude says:


    They were needed for the same reason affirmative action was needed. Market forced malfunctioned in the face of human prejudice. People in certain poor areas (and disproportionately of certain minorities) were unable to get loans that were perfectly sound relative to their income. Banks had basically abandoned even looking at giving loans in certain zip codes. To counter this and not leave these people victims of predatory substandard lenders the CRA was created basically saying that the money saved and deposited by people in certain zip codes should to a certain extend be lend back out to people in those zip codes. There were no demand that irresponsible loans should be given, those did only appear in the CRA community after they had been invented and proven profitable with regular middle class people (after Wall Street had invented the “bribe a AAA stamp and unload the crap in 3 month” approach – and then rest is history.

  15. Jason says:


    That’s your theory. If sound finance says X is as credit worthy as Y and securitization means investors get faceless collateral, there is no additional motivation needed to originate and securitize these loans than the almighty dollar. CRA loans were securitized in the 1990s before the boom. Dale Westhoff, at Bear Stearns, wrote one of the first research papers on the risk characteristics and expected performance of this collateral. I don’t remember the details of his paper. However, my lasting impression is that he tried to quantify the performance given reduced standards. Both Bear and Pru were already leaders in subprime (called Home Equity Loans, i.e. HEL, in those days) so their methods were applied to the analysis of CRA.

    In any case, CRA loans were always a very small part of the securitized universe. They, themselves, weren’t the problem. There is a secondary question that seems to be lost. Did they lead to problems? “Cheese” suggests they established a new way of looking at lending. That may go too far. They were part of the trend, yes. The important question that I rarely see discussed is whether regulators approved M&A according to the disposition of institutions to adopt the “new finance” and leave the “old school” banks without ability to expand their markets? Sadly, this question is too hard to answer, since these discussions happen behind close doors. Circumstantial evidence only shows that the new mega-lenders did use the “new finance.” Correlation isn’t causality.

  16. Anyone who really believes that the CRA caused the crisis only has to point to the huge housing boom in inner cities and minority owned housing regions.

    Oh, wait . . .

  17. whskyjack says:


    As I pointed out before, for some people this is a religious problem. (not Christian vrs Jew vrs Muslim , ect. but a belief backed up by faith rather than fact.)
    Some just can’t get their head around the fact that bankers would allow their prejudices to interfere with their making money. They have a religious belief in the powers of the market to solve everything. Notice how your fact based post was dismissed as just “theory” and then look at his follow up. Classic

    If you were engaged in an empirical argument then the preponderance of the facts should carry the day. But instead you have a faith backed belief and only a leap of faith can change a persons mind. Almost impossible unless the person comes close to destruction because of his beliefs.

    Once in a while over in the social science departments you get lucky. I took a class where philosophy Prof gave us a weeks worth of discussion on different types of arguments. I don’t even remember what the class was about but I did remember that week.


  18. DeDude says:


    No it’s not a “theory” I am simply pointing to FACTS. Better qualified minority candidates for jobs and loans were back then routinely rejected for jobs and loans. Those are cold hard well-documented facts that you can check out if you care. So yes indeed additional motivation was needed – and yes indeed that was another example of how your THEORY of efficient markets (no additional motivation needed) does not fit the facts of the observable world (even if it does sound nice as a theoretical framework).

    I think Jack has it right – markets have been proven in multiple cases to be inefficient and/or harmful to society as a whole – but the logic conclusion of those facts are that government has to manipulate and block free markets (when they cause harm) – and for some people that conclusion is a lot more painful than denying facts.

  19. Greg0658 says:

    “don’t make waves be like the rest of us”
    thats a line in a song .. it escapes me
    * make waves is what its about – creates opportunity**
    thing is in an efficient world of one feather
    who’s next – ’cause goto *

    thanks for the drill down on “basically abandoned … certain zip codes. To counter this … the CRA was created basically … lend back out to people in those zip codes.”
    finance can and does weed control

    balanced banking sectors – heard that somewhere else – I think would help .. but then goto *
    ’cause people gotta make work – when none exists – to breathe

    balanced banking sectors with BIG oil & food coming from distant places – how can that be done? – that is the question

    ** reminds me of that line in tone of OJ from Garden of Allah sung by Don Henly
    ps – I hope ya get the “who wants to be Normal” spot by miniU