The Community Reinvestment Act: Questionable Premises and Perverse Incentives
Having just passed the twentieth anniversary of the enactment of the Community Reinvestment Act ("CRA" or "Act"), this is an appropriate time to take stock of the effectiveness of the legislation and to consider whether it continues to be useful as a tool for addressing the problems of neighborhood decline and discrimination in the lending market. Although discrimination in lending and the decline of certain inner-city neighborhoods is a problem that the CRA has not been able to solve, most observers would agree that the situation has improved since the mid-1970s. In particular, there has been notable progress toward the elimination of explicit redlining - a problem the CRA was designed to address. Perhaps it is impossible to demonstrate what portion of that progress is due to the CRA itself and what is a result of broader economic and social change that has occurred in this country over the last twenty years. Nevertheless, both supporters and opponents of the CRA generally agree that the Act has been an important factor in pushing banks to lend in previously under-served areas.
In this paper we will argue that the CRA as it is currently understood and enforced is no longer an appropriate tool for dealing with discrimination in the lending market and the lack of access to credit in neighborhoods dominated by minorities and people of modest, or minimal, means. The statute is based on premises that are questionable in today's lending market, and thus it is not clear that the social benefits provided by the statute are significant. Further, enforcement of the statute generates certain perverse incentives that are costly to society. We emphasize the costly incentive effects in this paper.6 While the goals of the CRA remain desirable, the current enforcement framework should be reformed.
Vincent D. Rougeau and Keith N. Hylton. "The Community Reinvestment Act: Questionable Premises and Perverse Incentives." Annual Review of Banking Law 18, (1999): 163-196.