The Community Reinvestment Act and the Economics of Regulatory Policy

This article discusses the economic consequences and social implications of the Community Reinvestment Act. The CRA has direct economic effects on banks and neighborhoods and these neighborhoods also gain social benefits from the availability of credit which increase the quality of life in these areas. The article identifies the economic issues associated with providing access to credit in low and middle-income areas. Many of these problems are caused by the information asymmetry between lenders and borrowers because lenders do not realize the positive social benefits of the availability of credit in these areas. It contends that the ambiguous language of the CRA allows for flexibility to make it a viable mechanism for achieving efficiency and equity. Finally, the article recommends a market-based improvement to the CRA by creating property rights for a new financial asset that provides more flexibility to banks in meeting their CRA lending requirements. ∗Christopher A. Richardson, Ph.D., is an economist in the Housing & Civil Enforcement section of the U.S. Department of Justice’s Civil Rights Division. He was previously a financial economist at the Federal Deposit Insurance Corporation. The views expressed in this Article are those of the author and do not necessarily represent those of the Department of Justice or its staff. THE COMMUNITY REINVESTMENT ACT AND THE ECONOMICS OF REGULATORY POLICY Christopher A. Richardson*