Mortgage Lending, Default, and the Community Reinvestment Act

The Community Reinvestment Act (CRA) encourages banks to lend to low- and moderate-income individuals. This paper estimates the effect of the CRA on mortgage lending, exploiting variation in the set of banks whose lending performance is assessed in a given neighborhood due to redefinitions of Metropolitan Statistical Areas in 2003. Incorporating a typical tract into one additional banks' assessment area increased mortgage lending there by approximately 2%. Lending to low-income borrowers was particularly affected. While income-conditional default risk was little changed, CRA-induced loans were riskier than average, due to their borrowers' lower incomes.