Community Reinvestment Act Enforcement and Targeted Mortgage Lending

Drew Dahl, Douglas Evanoff and Michael F. Spivey
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Michael F. Spivey: Clemson University

No 200806, Working Papers from Utah State University, Department of Economics and Finance

Abstract: Significant disagreement exists as to whether the Community Reinvestment Act (CRA) influences the lending behavior of financial institutions. We conduct empirical tests on the lending of banks directly affected by regulatory enforcement of the CRA those experiencing upgrades or downgrades in their CRA ratings to evaluate whether the ratings changes were associated with lending behavior. Results indicate that: 1) upgraded banks had higher relative levels of lending than did downgraded banks, which is consistent with a hypothesis that banks adjust lending to satisfy CRA requirements; 2) downgraded banks show little evidence of increased lending following a downgrade despite apparent incentives for them to do so in an attempt to improve their CRA ratings; and 3) both downgraded and upgraded banks increased lending following implementation of new CRA regulations intended to more closely align CRA ratings with actual lending outcomes.

Pages: 37 pages
Date: 2009-01-14
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