Academic journal article Cityscape

Using Credit Reporting Agency Data to Assess the Link between the Community Reinvestment Act and Consumer Credit Outcomes

Academic journal article Cityscape

Using Credit Reporting Agency Data to Assess the Link between the Community Reinvestment Act and Consumer Credit Outcomes

Article excerpt

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Introduction

Access to credit is critical to a well-functioning economy. It enables consumers to smooth their consumption over good and bad times, businesses to invest and expand, and individuals to become homeowners. Consumers and businesses in lower-income areas tend to have less access to credit than their higher-income counterparts. Although it may make sense that lenders are more willing to lend to those whom they have high confidence will be able to repay the loan, it is possible that, from a societal perspective, access to credit is less in low-income areas than is optimal for economic growth. If market failures occur in low-income areas such that lenders do not serve individuals who are nonetheless "credit worthy," then policy intervention has a role in increasing lenders' incentives to lend in those areas. The Community Reinvestment Act1 (CRA), enacted in 1977, is an example of such a policy. The goal of the CRA was to encourage depository institutions to help meet the credit needs of their local communities, including low- and moderate-income (LMI) neighborhoods.

Over the years, the CRA has attracted broad interest from researchers and policymakers. We seek to determine if it has been effective in expanding access to credit in lower-income areas.

Much of the research on the CRA has focused on mortgage lending. This article adds to the literature by examining broad measures of consumer credit market activity available in the Federal Reserve Bank of New York's Consumer Credit Panel (CCP). The longitudinal database, comprising individual credit records maintained by Equifax, is a nationally representative 5-percent sample of individuals with consumer credit records (hereafter, CCP/Equifax data). The database allows for us to examine a rich set of consumer credit outcomes, including mortgages and foreclosures, total number of trades (accounts), delinquencies, and credit risk scores.

The main challenge in determining whether a policy like the CRA has had a salutary or adverse effect is that people living in LMI areas who are the targets of the policy are likely to have different outcomes from people living in higher-income areas, for reasons that have nothing to do with the policy. We need a way to compare outcomes in areas that are likely to be the same, with the sole exception being that one group is affected by the CRA and one is not. In this study, we use a feature of the CRA eligibility rules to create only such comparisons. A census tract is considered LMI, and activity in that census tract will count toward a depository institution's CRA activities, if the MFI in that census tract is less than 80 percent of the Area Median Family Income (AMFI).2 This creates the potential for using a regression discontinuity design; we can examine whether a discontinuous change in consumers' outcomes exists for those in neighborhoods that are slightly below that 80-percent cutoff-which are thus in CRA-eligible areas-compared with those in neighborhoods at or above 80 percent , which are not in CRA-eligible areas. If we assume that people in neighborhoods where MFI is at 79 percent of the AMFI are unlikely to be very different from people in neighborhoods where MFI is at 80 percent of AMFI, this comparison gives insight into the causal effect of the CRA on credit outcomes. Further, we can use this methodology to examine whether the effect of CRA eligibility is different before and after the financial crisis.3

We find evidence that the CRA expanded access to credit in LMI neighborhoods. Neighborhoods (census tracts) that barely meet the CRA-eligibility criteria have 9 percent more accounts overall than do neighborhoods that are immediately outside the eligibility threshold. Further, more people in the CCP/Equifax data are in neighborhoods that barely meet the CRA eligibility threshold, and the data are of higher quality with fewer missing values. We see no statistically meaningful increase in delinquencies, mortgages or risk of foreclosures, or changes in credit risk scores in census tracts at the CRA eligibility threshold. …

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