Community Reinvestment Act Induced Banks To Take Bad Risks, Economic Study Finds

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The Community Reinvestment Act, which “prods banks to make loans in low-incomecommunities,” encouraged banks to make riskier loans, concludes a recent study from the National Bureau of Economic Research.

As J.D. Tuccille at Reason notes, the federal government played

a role in inducing, even strong-arming, banks to take risks they otherwise would have avoided. Specifically, the Community Reinvestment Act and related policy pressures are pointed to as culprits, part of a government effort to extend home-ownership in lower-income neighborhoods. Now comes a new study from the National Bureau of Economic Research that says, quite bluntly. that the CRA played a major role.

In the academic world, mealy-mouthed delivery of even powerful conclusions is the norm, so it’s refreshing to see authors Sumit Agarwal, Efraim Benmelech, Nittai Bergman, Amit Seru answer the title’s question, “Did the Community Reinvestment Act (CRA) Lead to Risky Lending?,” with the clear, “Yes, it did. … We find that adherence to the act led to riskier lending by banks.” The full abstract reads:

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

Investor’s Business Daily does a very nice job of summarizing the nature of the pressure brought on lenders . . .“‘We want your CRA loans because they help us meet our housing goals,’ Fannie Vice Chair Jamie Gorelick beseeched lenders gathered at a banking conference in 2000, just after HUD hiked the mortgage giant’s affordable housing quotas to 50% and pressed it to buy more CRA-eligible loans to help meet those new targets. ‘We will buy them from your portfolios or package them into securities.’ She described ‘CRA-friendly products’ as mortgages with less than “3% down” and “flexible underwriting. “From 2001-2007, Fannie and Freddie bought roughly half of all CRA home loans, most carrying subprime features.”

Tuccille is correct that beginning the article abstract with the certainty of “Yes, it did” is unusual for generally cautious academics. The conclusion is also worth highlighting, as the authors note their estimated impact of the CRA on lending risk “provide[s] a lower bound to the actual impact of the Community Reinvestment Act. If adjustment costs in lending behavior are large and banks can’t easily tilt their loan portfolio toward greater CRA compliance, the full impact of the CRA is potentially much greater than that estimated” in their study.

The 2010 Dodd-Frank Act makes enforcement of the Community Reinvestment Act even more onerous and rigid by taking its enforcement away from non-ideological bank regulators who had an interest in safeguarding banks’ financial health, and giving it to the Consumer Financial Protection Bureau, which gives little thought to the effect of its actions on the stability of the financial system. The Community Reinvestment Act was enacted in 1977, but it was not enforced very stringently until regulations dramatically expanded its reach in the 1990s. It then became one of the factors that contributed to the financial crisis. The Obama administration and Congress responded to the financial crisis by making the financial system even worse, and encouraging more of the risky lending that helped spawn the crisis.

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Curt served in the Marine Corps for four years and has been a law enforcement officer in Los Angeles for the last 24 years.

6 Responses to “Community Reinvestment Act Induced Banks To Take Bad Risks, Economic Study Finds”

  1. 1

    Nan G

    Obama was a lawyer who represented some of those low income would-be borrowers who would prove to be incapable of paying off their loans once they got them.
    It is not likely he will take responsibility (or allow Clinton to) for what banks suffered as a consequence of his and Bill’s policies.
    The Google-bombers make certain there are more articles that come to the front page of any search showing the CRA had NOTHING to do with the banks’ problems.
    I think Google-bombing is a big part of Obama’s strategy.

    If Mata is still around I’d be interested in her slant on this.

  2. 2


    There is plenty of evidence to be looked at over the period from the 1990’s. There were newspaper articles from tht NYT, the Washington Post to the LA times touting how many who had never been able to get a home loan were now getting a chance to have one under the Clinton administrations push for broader based home ownership.
    One of the better articles was published in the fall of 2000 in the City Journal by Howard Husock called the Trillion Dollar Bank Hustle that Bodes Ill for Cities. While not predicting the timeline and actual housing bust (no one could do that) it showed just how the government in connection with community organizer groups were pushing for more risky loans and how the author knew it wouldn’t end well.

  3. 3


    I KNEW IT!!!

    I was a young Bank officer in the early 90’s and I was required (forced) to go listen to Andrew Cuomo give a speech where he talked about “helping more people achieve the American Dream” and then went on to say that this meant taking more risk and that this would likely result in more loan defaults – “but not more then the system could handle”.

    I’ve told people this but they didn’t believe me…

  4. 4


    It is nice that an academic researcher was honest about the mortgage crisis. Maybe we can get the same researchers involved in the climate change fraud!

  5. 5

    Hard Right

    Only the left could not see this, because they did not want to.
    Unfortunately, thanks to the left’s near monopoly over the media, people blame the GOP entirely.
    Yes, they deserve some blame, but the lion’s share belongs to the dems.

  6. 6


    I worked for B of A up till Jan of 2012 and I watched Ken Lewis and all the “smart people” who over saw the acquisition of Country Wide and Merrill Lynch. At the time they were talking about how these two companies would make B of A the cornerstone of every facet of American life. What they failed to do was look deeply enough into why the Government was pushing them to buy these companies so vehemently. I said at the time that if they agreed to take over these companies without written assurance by the Feds to cover their butts it could turn bad quickly. History shows what happened, Ken Lewis took an early retirement of somewhere around 60 million and B of A has lost more than half of its holdings and their stock was once $43 a share and now hovers around $6 a share. I look for them to be bought out in the next 5 years.

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