February 05, 2013

Last month, the University of North Carolina Center for Community Capital published a paper on the history of the Community Reinvestment Act (CRA) and its role in the housing market downturn and the financial crisis.  Contrary to other reports and arguments often made against the CRA, the UNC paper argues that the CRA is not to blame for inflating the sub-prime mortgage market and it has not had a negative impact on the economy or the housing market.

The report argues that the CRA has encouraged lending to low- and moderate-income areas, has enhanced access to credit, and has fostered competition among banks in previously underserved communities.  The report cites a legal review conducted by Michael Barr in 2005 which concluded that the CRA has been an effective response to mortgage market lending failures.  Furthermore, lending by institutions with CRA obligations has not been more risky or less profitable than other lending activities, according to the report.  It also says the majority of studies have found that the CRA played little to no role in risky sub-prime lending during the last decade, and that CRA-encouraged loans as a whole performed better than average.

The report also explains that there is evidence that CRA loans are less likely to go into foreclosure than the wider universe of sub-prime loans. A previous UNC study found that CRA-motivated prime loans originated between 2003 and 2006 were far less likely to enter default than sub-prime loans made to borrowers with similar incomes and credit ratings. These CRA-motivated prime loans were comparable to other quality loan products, including loans financed by state HFAs. While the report does not discuss the state HFA loan data, the chart shows notably the low default rates of HFA lending.

A study by the Federal Reserve Board of Governors found that only six percent of subprime loans originated in 2005 and 2006 were subject to CRA review, which is a very small fraction of the entire mortgage market.  Overall, loans subject to CRA review made up a tiny portion of the mortgage market and performed better than the market as a whole during the busiest time for sub-prime lending.