AbstractDebunking the CRA Myth – Again
Authors: Carolina Reid with Ellen Seidman, Mark Willis, Lei Ding, Josh Silver, Janneke Ratcliffe
Research Report | January 2013
Since its enactment in 1977, the Community Reinvestment Act (CRA) has been the subject of extensive debate, which has intensified in the wake of the subprime crisis. One of the pernicious myths surrounding CRA is that it encouraged banks to make risky loans to low‐ and moderate‐income borrowers.
This argument has been made primarily by conservative think tanks, like American Enterprise Institute, who find it convenient to include CRA in their general position against governmental intervention in the private market.
But efforts to blame CRA for the most recent crisis reflect a deep misunderstanding of the scope and scale of CRA and its implementation. Indeed, the “blame the CRA” story has been refuted by industry leaders and researchers time and time again. Unfortunately, this narrative refuses to go away.
In this paper, we review the research evidence on CRA and show that there is no credible research to support the assertion that CRA contributed to an increase in risky lending during the subprime boom. In particular, we present a detailed rebuttal of a recent paper published by the National Bureau of Economic Research, titled “Did the Community Reinvestment Act Lead to Risky Lending,” which purports to find evidence that “yes, it did.” The study is severely flawed, both in terms of the empirical analysis and in the authors’ interpretation of the results, and thus fails to contribute to the existing literature on both the strengths and weaknesses of CRA.
Rather than trying to place blame where none exists, we argue that the focus of the debate should be on how CRA can be modernized and improved to better reflect the current financial services landscape and meet the continuing credit needs of America’s communities.