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Abstract
This study provides new evidence on the impact of the Community Reinvestment Act (CRA) on mortgage lending by taking advantage of an exogenous policy shock in 2014, which caused significant changes in neighborhoods’ CRA eligibility in the Philadelphia market. The loss of CRA coverage leads to an over 10% decrease in purchase originations by CRA-regulated lenders. While nondepository institutions replace approximately half, but not all, of the decreased lending, their increased market share is accompanied by a greater involvement in riskier and more costly FHA lending. This study demonstrates how different lenders respond to the incentive of CRA credit.
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Notes
1 About one in five of all the tracts in the U.S. with changed CRA eligibility status from 2013 to 2014 were in the Philadelphia MD.
2 The CRA assessment area for a retail-oriented banking institution must include “the areas in which the institution has its main office or operates branches and deposit-taking automated teller machines and any surrounding areas in which it originated or purchased a substantial portion of its loans” (Avery et al., Citation2000, p. 712).
3 For more details see www.ffiec.gov/cra/OMB_MSA.htm.
4 AMFI is defined as the MFI for the MD if a family or geography is located in an MSA that has been subdivided into MDs. The Federal Financial Institutions Examination Council (FFIEC) estimates MFI for MSAs, MDs, and nonmetropolitan portions of each state.
5 The income designation is based on the tract-to-area MFI ratio, which is obtained by dividing the MFI of a tract by the AMFI. If the tract-to-area MFI ratio is below 50%, the tract is considered low-income; if between 50% and 79.9%, moderate-income; if between 80% and 119.9%, middle-income; and if 120% or higher, upper-income. An LMI tract represents one in the income level of low-income or moderate-income.
6 We use the term “CRA-eligible tract” as shorthand only to mean that the tract is an LMI tract with an MFI below the threshold of 80% relevant to CRA regulation. This 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 middle- or upper-income neighborhoods is still eligible for CRA credit.
7 A small share of tracts changed their CRA eligibility status in 2012 and 2017 because of the use of new census data to determine the CRA eligibility of the neighborhood, which prevents us from including data from before 2012 and after 2017. A robustness check suggests the results are quite consistent (both in terms of sign and significance of the CRA effects) by further including the 2016 data.
8 Credit unions also take deposits but are not considered as depository institutions here as they are not subject to the CRA. The regulatory agency for the large national banks has been reported as “CFPB” in the HMDA data, though they are generally regulated by both the CFPB and the OCC.
9 The name of the same lender could be different in the SOD and HMDA data because there are some typos and different abbreviations used in different datasets. For example, we believe “Bank of America, National Association” in the SOD data and “Bank of America, N.A.” in the HMDA data should represent the same lender. Furthermore, the SOD data may continue to use a lender’s old name in the year in which the lender had been merged with another one, while HMDA data have been using the name of the merged lender.
10 In 2013, the average number of purchase loan applications was 12.6 among newly ineligible tracts. The 2013 means of different outcome measures for the corresponding subpopulation can be found in Table 2; the relative changes are not included in the tables summarizing the regression results.
11 Of course, not all coefficients are statically significant, but such an exercise is still of merit. The lack of significance in some of the regressions may partly be due to our relatively small study sample size, compared with other studies using national data.
12 In January 2015, FHA announced a sharp reduction in the annual premium. For a typical home purchase loan with a loan amount of $625,000 or less, a loan-to-value ratio greater than 95%, and a loan term longer than 15 years, the annual insurance premium was reduced by 50 basis points (a reduction from 135 basis points to 85 basis points).
13 Here, minority borrowers include African American, Hispanic, and other minority borrowers who are not non-Hispanic whites.
14 The HMDA data report borrowers’ income (in $1,000s), which may be different from borrowers’ actual family income. For example, if a two-wage earner family decides to apply for a mortgage using the income of one of the wage earners, the borrower income reported in the HMDA data could be significantly lower than the actual family income.
15 The time trends of the number of applications and denial rates are quite parallel before 2014 for the treatment and control groups as well.
16 The city of Philadelphia adopted a new tax assessment system, the Actual Value Initiative (AVI), in 2014. Philadelphia had not assessed its properties, particularly older ones, for decades until the launch of the AVI program to simultaneously assess properties based on their actual market values.