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FRBNY Economic Policy Review / June 2003169

The Twenty-FifthAnniversary of theCommunity ReinvestmentAct: Past Accomplishmentsand Future RegulatoryChallenges

Introduction and Summary

he U.S. Congress passed the Community ReinvestmentAct (CRA) in 1977 to encourage depository institutions tomeet the credit needs of lower income neighborhoods. TheCRA was built on the simple proposition that deposit-takingbanking organizations have a special obligation to serve thecredit needs of the communities in which they maintainbranches. At the time of the CRA’s passage, banks and thriftsoriginated the vast majority of home purchase loans. TheCRA’s initial focus on areas where CRA-regulated institutionsmaintained branches made sense because restrictions oninterstate banking and branching activities were limiting thegeographic scope of mortgage lending operations.Today, the CRA continues to provide significant incentivesfor CRA-regulated institutions to expand the provision of credit to lower income and/or to minority communities wherethose institutions maintain deposit-taking operations. Yet inthe quarter century since the act’s passage, dramatic changeshave transformed the financial services landscape, especially inhome mortgage lending. These changes have combined toweaken the link between mortgage lending and the branch-based deposit gathering on which the CRA was based. Today,less than 30 percent of all home purchase loans are subject tointensive review under the CRA. In some metropolitan areas,this share is less than 10 percent.With a substantial portion of home purchase lending nolonger subject to detailed scrutiny under the CRA, the issue of how best to modernize the CRA has emerged as an importantpublic policy challenge. Some argue that the CRA’s costsexceed its benefits. Others advocate expanding regulatory oversight. Congress considered changes to the CRA in thedebate leading up to the passage of the 1999 Gramm-Leach-Bliley Financial Modernization Act (GLBA), but in the end it

William C. Apgar and Mark Duda

William C. Apgar is a lecturer in public policy at Harvard University’s John F.Kennedy School of Government and the senior scholar at Harvard’s JointCenter for Housing Studies; Mark Duda is a research analyst at the JointCenter for Housing Studies.The views expressed are those of the authors and do not necessarily reflect theposition of the Federal Reserve Bank of New York or the Federal ReserveSystem.

170The Twenty-Fifth Anniversary

did little to make the CRA conform to the realities of thefinancial services marketplace. Although the CRA continues toprovide significant benefits to lower income households andcommunities, reform is needed for the act to encouragefinancial services providers to meet the continuing needs of thecommunities they serve.

1.1Summary of Key Findings

This paper draws on a more extensive Joint Center for HousingStudies assessment of the CRA, funded by the FordFoundation. The larger study not only assesses the impact of the CRA on home purchase and home refinance lending, it alsopresents commentary on the CRA’s impact on small-businessand multifamily lending, as well as on the provision of financialservices more generally. In addition, the Ford Foundationstudy presents qualitative findings concerning the CRA’simpact on the operation of banks and mortgage lenders as wellas the impact on the relationship between mortgage lendersand community-based advocacy organizations.Our paper focuses on the regulatory and legislativechallenges that confront the act at age twenty-five. Inaddition to providing a brief review of the evolution of CRAregulations, we document the impact that the CRA has hadon home mortgage lending to lower income people andcommunities and assess changes in industry structure. Weconclude with a discussion of current legislative andregulatory challenges.

The CRA Has Expanded Access to Mortgage Capital

Working in combination with the Home Mortgage DisclosureAct (HMDA) and the closely related Fair Housing and FairLending Legislation, the CRA continues to expand access tocapital for CRA-eligible borrowers. Here, CRA-eligibleborrowers include those with an income of less than80 percent of the area median income and/or those living incensus tracts with a median income of less than 80 percent of the area median. CRA-regulated lenders refer to federally regulated banks and thrifts as well as their mortgage company and finance company affiliates.•In both 1993 and 2000, CRA-regulated lenders operatingin their assessment areas (areas where they maintaindeposit-taking operations) had shares of conventional,conforming prime home purchase loans to CRA-eligibleborrowers that exceeded the equivalent shares for out-of-area lenders or noncovered organizations.•The CRA-eligible share of conventional prime lending toblacks is as much as 20 percentage points higher forCRA-regulated lenders operating in their assessmentareas than for independent mortgage companies. ForHispanics, the equivalent gap is 16 percentage points.

The Changing Mortgage Industry Structure Reducesthe CRA’s Impact

Dramatic changes in the structure of the financial servicesindustry—and particularly in mortgage banking—havecombined to weaken the link between mortgage lending andthe branch-based deposit gathering on which the CRA wasbased. Consequently, this may also be reducing the CRA’seffect on the mortgage market.•In 2000, the twenty-five largest lenders each mademore than 25,000 home purchase loans and accountedfor 52 percent of all home purchase loans made that year. In contrast, only fourteen organizations mademore than 25,000 loans in 1993 and accounted for only 23.5 percent of all home purchase lending.•Banking organizations operating out of their assessmentareas have expanded rapidly and today constitute thefastest growing segment of the residential mortgagemarket. As a result, between 1993 and 2000, thenumber of home purchase loans made by CRA-regulated institutions in their assessment areas as ashare of all home purchase loans fell from 36.1 percentto 29.5 percent.•Assessment-area lending varies from one market areato the next. Of the 301 metropolitan areas examined inthis study, the assessment-area share of lending variesfrom 6 percent in Denver, Colorado, to 74 percent inDubuque, Iowa.

The CRA Fails to Keep Pace with the Changing Industry Structure

The changing industry structure, along with the fact that overtime the CRA may have expanded the capacity of all industry players to serve lower income borrowers, has eroded CRA-regulated entities’ lead in the conventional prime homepurchase market. When Congress modernized financialservices through the GLBA, it did little to bring the CRA intoconformance with the rapidly evolving world of financialservices. Reform could follow one or both of two distinctpathways:

FRBNY Economic Policy Review / June 2003171

•Reform could build on the CRA’s traditional mortgagelending focus by expanding assessment areas to cover alarger share of lending by banking organizations subjectto CRA and by extending the act to include independentmortgage companies and other newly emergingnonbank lenders.•Retail banking services and community-developmentlending arguably remain most closely linked to thebranch banking mechanism through which CRAobligations are defined and implemented. Reform couldtherefore build on the CRA’s traditional branch bankingfocus and reposition the act to give greater emphasis toproviding financial services to lower income people andto promoting the development of lower incomecommunities.Before turning to a more detailed discussion of thesefindings, we briefly review the methodology used to generatethese results.

1.2Methodology

The work presented here uses the Joint Center for HousingStudies Enhanced HMDA Database, which combines loan-level data on borrower and loan characteristics with data onlender characteristics and branch locations from the Board of Governors of the Federal Reserve System. The FederalReserve’s lender file contains information that facilitatesaggregation of individual HMDA reporters into commonly owned or commonly controlled institutions that can be analyzedas integrated units. The Board’s branch-location data are thesource of assessment-area definitions used in the analysespresented here. For a reasonable approximation of trueassessment areas, this report assumes that if a lending entity subject to the CRA has a branch office in a particular county,then that county is part of that entity’s assessment area.Loans made in counties where the lending entity does nothave a branch are assumed to fall outside of that entity’sassessment area.Other information on metropolitan area and neighborhoodcharacteristics was linked to the HMDA loan-level data toassess the way economic, demographic, and housing markettrends influence lending. These data included U.S.Department of Housing and Urban Development (HUD)data used to classify loans based on both the income of theapplicant and the income of the census tract where theproperty is located. HUD was also the source for the annuallisting of HMDA reporters specializing in subprime ormanufactured-home lending.In addition to quantitative analyses, this paper draws onqualitative information gathered during a series of discussiongroups and in-depth interviews. In the spring of 2000, the JointCenter for Housing Studies held eleven discussion groups withmore than 100 experts in four cities—three each in Atlanta, NewYork, and San Francisco, and two in Washington, D.C. (Belsky et al. 2000). The Joint Center also conducted in-depth interviewswith more than 100 individuals in the Baltimore, Birmingham,Chicago, and Los Angeles metropolitan areas, as well as in ruralColorado. These interviews examined the CRA in the context of the changing organization of the mortgage industry, thegrowth of new affordable lending tools, and the resultingchanges in the provision of credit to lower income borrowers.

1.3HMDA Data Quality

This paper utilizes HMDA data to illustrate trends in mortgagelending. HMDA data have been collected since 1977, butbecause they were not reported at the loan level by nondepository lenders until 1993, the discussion focuses on the1993-2000 period. Even over this period, however, HMDA datahave a number of limitations. Perhaps most critical is the factthat the HMDA’s coverage of the mortgage market changedover the 1993-2000 period. One source of this differentialcoverage is the fact that although nondepository lenders werefirst required to report in 1993, some subset either did not, ordid so haphazardly for several years. Consequently, HMDAdata are likely to overstate somewhat actual lending growth forthe 1993-2000 period.Potentially more serious is the fact that the change inreporting requirements may differ by lender type, based on thespecialization of each lender. Therefore, some of the growth inlending to lower income households relative to that to higherincome households could simply reflect differential reporting if lenders specializing in lower income lending increased thereliability of their reporting over the period.Counterbalancing these limitations is the fact that theHMDA database is a large and fairly rich microlevel data sourceat the individual loan application level. No other data sourceaffords the opportunity to analyze lending patterns and trendsby borrower income, race/ethnicity, and gender in such detail.Further, HMDA loans are geocoded to census tracts, allowinga thorough exploration of the CRA’s impact on lending inlower income, minority, or other historically underservedmarket areas. These strengths and limitations also suggest theimportance of disaggregating the results by lender andborrower characteristics in an effort to control for reportingdifferentials across the various mortgage industry segments.

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