Bank pledges to increase mortgage lending to minority and lower-income borrowers appear to be paying off, according to a study released today by the USC Lusk Center for Real Estate. The study conducted by Raphael Bostic, director of the Casden Real Estate Economics Forecast, with Breck Robinson of the University of Delaware, found rapid increases in conventional mortgage lending in historically disadvantaged communities where banks had entered into agreements with community groups under the Community Reinvestment Act. "While the banks might see CRA agreements as insurance against the costs of a fair-lending violation, sophisticated community groups are using this federal regulation to spur homeownership among low-income groups," said Bostic, a former senior economist with the Federal Reserve Board of Governors. He suggested that the potential negative publicity from community-based organizations that results from a lack of CRA activity may serve as an incentive for banks to direct additional resources to targeted individuals and communities in their service areas. Since the early 1980s, community organizations and financial institutions have entered into more than 300 CRA agreements nationwide. On the other hand, Bostic said, the community group pressure might serve a lender's best interests. "One very beneficial side effect of CRA agreements has been the development of innovative loan products that use alternative methods to assess the creditworthiness of potential borrowers," he said. "Lenders are discovering promising prospects among borrowers previously deemed as prohibitively high risk." A recent Federal Reserve survey showed that many of those alternative loan products have been profitable for banks, he said. CRA agreements lie outside the regulatory framework, involving just the lenders and a community organization. Although no government monitoring mechanism exists to ensure compliance with CRA agreement pledges, Bostic found that savvy community groups have learned to closely monitor the agreements entered into by the lenders. However, his research also showed that CRA-motivated lending to minorities was short-lived, possibly suggesting that some community groups stopped monitoring activity or that lenders only needed the CRA "insurance" for a short period, such as during the course of a merger. "Clearly, a key issue is why lenders appear to stop extending additional loans to communities that have demonstrated profitable lending opportunities," Bostic said. "Future research is needed to shed more light on the patterns of lending by institutions that enter into CRA agreements."
August 6, 2002