Market Forces or CRA-induced Externalities: What Accounts for the Increase in Mortgage Lending to Lower-Income Communities?

This paper examines whether CRA incentives were influential regarding the large increase in lending to lower-income communities through the 1990s and early 2000s. The approach capitalizes on the fact that, because the CRA does not apply to all lenders in all locations, the regulations establish market conditions that approximate a natural experiment. We examine mortgage lending activities during 1994-1995, 1996-1997, 1998-1999, and 2000-2001 and compare the level and the change in lower-income community lending across lenders subject to CRA incentives to varying degrees, controlling for a number of economic and lender characteristics. While the results provide clear support for the view that the CRA has been influential, models that focus on changes in activity over time directly support the view that market forces or some other factors, rather than the incentives established via the CRA, are more important in explaining the observed trends. Taken together, the results provide a mixed picture regarding the importance of the CRA. The results suggest that CRA covered institutions continue to have higher levels and shares of lending to lower-income communities, but that the recent increases in such lending appear to be more a function of market forces than regulation.