Bank Adaptation to Neighborhood Change: Mortgage Lending and the Community Reinvestment Act

This talk will report on a recent study that used the Community Reinvestment Act (CRA) as a case study of unintended consequences of a regulation. The study, which was carried out by Lee and Raphael W. Bostic, found that banks approve loans more frequently in rapidly improving neighborhoods and that this effect is strongest within banks’ CRA assessment areas (as opposed to places outside those areas). Although this approach is appealing to bank officials because it reduces default risk while complying with fair lending regulations, it suggests that the CRA regulations unintentionally lead banks to favor some underserved neighborhoods at the expense of other areas that could use more assistance.