An Analysis of the Community Reinvestment Act

Abstract

. . . Unfortunately, because the subprime crisis occurred so recently, there is no definitive study that allows us to deliver a verdict on whether or not the Community Reinvestment Act caused the increase in subprime loans that eventually defaulted and triggered the crisis. What we can do, however, is (1) create a better context for studying the CRA by piecing together the history of events that culminated in the Community Reinvestment Act in 1977, (2) understand how the CRA evolved over the next thirty years, and (3) look at trends in CRA lending and subprime lending in the past fifteen years to make educated inferences about the link between the CRA and the subprime crises. The goal of this paper is to do just that, while also remembering that people remain at the heart of this issue. As I explain in the next section, the ultimate purpose of the CRA was to improve the quality of housing and general well-being for moderate- and low-income individuals, and the ultimate question we need to answer is whether or not the CRA is an effective tool to fulfill that goal. This paper by no means provides an exhaustive answer, but it does lay out a framework for making the decision. It summarizes the modern history of government involvement in the housing market (Section II), discusses in detail the provision of the CRA and how it has changed over the years (Section III), presents the results of the CRA and its impact on lending (Section IV), draws conclusions about the role of the CRA in the financial crisis based on the historical background and results of the CRA (Section V), and finally, concludes with remarks on the future of the CRA. The analysis presented in this paper is limited to home mortgage loans unless otherwise indicated, since it was subprime home mortgage loans that caused the financial crisis. [From Introduction]