What Makes CRA Agreements Work? A Study of Lender Responses to CRA Agreements

Paper prepared for the Federal Reserve System's third biennial research conference titled " Sustainable Community Development: What Works, What Doesn't and Why " DRAFT Do not quote or cite without permission of the authors. Board of Governors of the Federal Reserve System. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Board of Governors of the Federal Reserve System or its staff. Abstract One response to the incentives provided by the Community Reinvestment Act of 1977 has been for lenders and community groups to enter into CRA agreements, which involve pledges to provide prescribed levels of service to targeted neighborhoods. This paper examines whether lenders actually change their behavior after entering into CRA agreements. Using data from NCRC on CRA agreements and HMDA on mortgage lending, we find results that paint a cautiously optimistic picture. Our preliminary results suggest that lenders increase their targeted lending when an agreement comes into force and that the increase lending level persists after the agreements end. Additional analysis points to mortgage counseling and technical assistance as a key component of effective agreements. These results are preliminary, as the analysis currently lacks the incorporation of time, which is a particularly important consideration given that overall lending has increased during the time period upon which the study focuses.