Effects of the Community Reinvestment Act on small business lending

ABSTRACT

This study examines the effectiveness of the Community Reinvestment Act (CRA) in facilitating small business lending to lower-income neighborhoods. Taking advantage of an exogenous policy shock that resulted in neighborhood-level changes in CRA eligibility, we identify changes in small business lending in tracts that became CRA eligible and CRA ineligible and compare these with control groups constructed in two ways. The results of our difference-in-differences analysis uniformly show increases in the number of loans associated with CRA eligibility, which is consistent with a view that the CRA promotes small business lending in lower-income neighborhoods.

Acknowledgments

The authors thank Neil Bhutta, Leonard Nakamura, Nathaniel Pattison, Daniel Ringo, and participants at the 2018 American Real Estate and Urban Economics Association (AREUEA) National Conference and the Southern Economic Association’s 88th Annual Meeting for helpful comments. The views expressed in this paper are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Philadelphia, or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Depository institutions include federally chartered financial institutions, such as national banks and savings associations, and state-chartered commercial and saving banks. Smaller institutions that meet certain criteria undergo lending and community reinvestment tests or a lending test only.

2. Our use of CRA-eligible tract is shorthand and does not necessarily mean that none of the lending to a CRA-ineligible neighborhood qualifies for CRA credit. For example, lending to LMI borrowers in neighborhoods above the CRA median family income threshold is still eligible for CRA credit.

3. The OMB periodically issues new delineations for the MSAs and revises existing ones to better reflect economic and demographic realities. See more details at www.ffiec.gov/cra/OMB_MSA.htm.

4. We exclude those census tracts that were nonmetropolitan areas in both 2013 and 2014, tracts with zero population, previously nonmetro and newly ineligible tracts, and newly nonmetro and newly eligible tracts (see Table A1 in the Appendix for the decisions we made to narrow the study sample).

5. For example, the control group for the newly ineligible tracts is those with unchanged CRA eligibility status, within a half-mile radius of a newly ineligible tract, and with a median family income between 80% and 100% of area median in 2013 or between 50% and 80% of the area median in 2014. We test an alternative set of control tracts in a later section.

6. Also, the number of small business loan purchases (1.6 million) was only one third of the loan originations (4.6 million) and the amount of small business loan purchases ($2 billion) was about 2% of the loan originations ($99 billion) in 2016.

7. In 2012–2013, the average numbers of small business loans and small business loans to smaller firms were 56.8 and 25.9, respectively, among the newly CRA ineligible tracts.

8. Consistent with this argument, we could find greater CRA effects over time when we interact the treatment variable with year dummies rather than the post dummy (Appendix Table A2).

9. The effects of gaining CRA eligibility in tracts remaining part of an MSA become significant when alternative control groups are used, such as using a narrower income range (70%–90% of area median) or the larger buffer (2 miles or 5 miles). Results are not included here but are available upon request.

10. The analysis of newly ineligible neighborhoods does not include the previously eligible tracts in nonmetropolitan areas. They may be defined as CRA eligible, but they are less likely to be included in lenders’ CRA assessment areas.

11. For example, the old Philadelphia MD alone has a total of 102 newly ineligible tracts and a total of 80 newly eligible tracts (Ding & Nakamura, in press).

12. The effects of losing CRA eligibility on small business lending in principal cities and the Northeast have the same sign and an even larger magnitude. The effects of gaining CRA eligibility remain positive but become significant in two areas, the Northeast and the Midwest. Detailed results are available upon request.

13. Because the CRA eligibility status for a small number of census tracts changed from 2002 to 2003 as a result of the use of the 2000 census information, we chose to focus on the 2003–2004 period only, instead of the 2002–2005 period.

14. The regressions using alternative control tracts identified by the propensity score matching method, instead of the spatial proximity approach, provide generally consistent results, with the CRA effects having the same sign and similar magnitude (although becoming slightly less significant in some specifications because matching has led to a smaller sample size). Results are available upon request.

Additional information

Notes on contributors

Lei Ding

Lei Ding is a senior community development economic advisor in the Community Development and Regional Outreach Department at the Federal Reserve Bank of Philadelphia. His research interests include housing and mortgage finance, community and economic development, and housing policy. Prior to joining the Philadelphia Fed in 2013, he was on the faculty of the Department of Urban Studies and Planning at Wayne State University. Previously, he was a senior research associate at the University of North Carolina at Chapel Hill. He holds a BS and a MS from Tsinghua University and a PhD in public policy from George Mason University.

Hyojung Lee

Hyojung Lee is an assistant professor of housing and property management in the Department of Apparel, Housing, and Resource Management at Virginia Tech and a research fellow at the Joint Center for Housing Studies of Harvard University. His research has focused on the impacts of demographic change on housing markets, the consequences of neighborhood change for urban policy, and the jointness of mobility, residential location, and housing tenure choice. He received a PhD in urban planning and development and a Master of Planning from the University of Southern California and a BS and a MS in civil and environmental engineering from Seoul National University.

Raphael W. Bostic

Raphael W. Bostic is president and chief executive officer of the Federal Reserve Bank of Atlanta. His research has spanned many fields, including home ownership, housing finance, neighborhood change, and the role of institutions in shaping policy effectiveness. Bostic was previously the Judith and John Bedrosian Chair in Governance and Public Enterprise at the Sol Price School of Public Policy at the University of Southern California. From 2009 to 2012, Bostic was the assistant secretary for policy development and research at the U.S. Department of Housing and Urban Development.