Neighborhoods Targeted by the Community Reinvestment Act Receive a Lower Quality of Financial Products and Services

Systemic racism in the financial system has long limited access to safe credit for people of color. Policymakers have taken steps to ameliorate racism in lending with civil rights legislation like the 1977 Community Reinvestment Act (CRA). Since its passage, the CRA has notably led to increased lending to households with low to moderate incomes (LMI) and LMI neighborhoods.

In this study, the authors investigate whether consumer laws—particularly the CRA—that aim to increase access to credit for communities of color and low-income communities have come at the expense of lower-quality financial services for these borrowers. Their primary data source is the Consumer Financial Protection Bureau (CFPB)’s Consumer Complaint Database, which they supplemented with demographic, income, mortgage, and education data from 2010 Census files, the 2012 Internal Revenue Service’s Statistics of Income database, and 2012 American Community Survey five-year estimates. The CFPB’s Consumer Complaint Database contains information on complaints lodged by consumers against financial institutions, including the financial product or service with which there is a complaint, the financial institution, details about the issue, and the consumer’s zip code.

Although the database covers various financial products, for control and comparison purposes, the authors limit their analysis to mortgage-related complaints over the 2012–16 period for which they have matched demographic data. Their final sample covers about 170,000 complaints across 16,309 zip codes. They use regression modeling to analyze the relationship between zip code–level demographic characteristics and the quality of financial services to consumers. They also match CRA-target zip codes—designated LMI areas—to similar non-LMI zip codes to compare the quality of financial services.

Key findings

• At the zip code level, lower incomes and education levels are correlated with higher numbers of mortgage-related complaints about the quality of financial services.
• Areas where people of color comprise more than 80 percent of the population have nearly twice the number of mortgage-related complaints about the quality of financial services compared with areas where people of color comprise fewer than 20 percent of the population.
• Comparing within the same metropolitan statistical area, CRA-target areas have about 28 percent more mortgage-related complaints than similar non-CRA-target zip codes.
• LMI areas with larger populations of color receive a notably lower quality of service than non-LMI areas with larger populations of color. The same effect doesn’t occur between LMI and non-LMI areas with below-median populations of color.
• Comparing similar CRA-target (LMI) and non-LMI zip codes nationwide, the CRA-target zip codes have about 58 percent more complaints about mortgage product and/or service quality, and the effect is much larger in areas with larger shares of populations of color.

Policy implications

• To adequately meet the credit needs of communities with low incomes and communities of color, policymakers need to consider not just whether capital is flowing into these communities but also the quality of that capital.
• Currently, CRA-required lending appears to come with a trade-off in terms of service and product quality. But updated regulations and reforms to incentive structures for financial institutions could potentially improve the quality of services provided to marginalized borrowers.