'Don't Know What You Got Till It's Gone' — The Effects of the Community Reinvestment Act (CRA) on Mortgage Lending in the Philadelphia Market

The Community Reinvestment Act (CRA), enacted in 1977, has served as an important tool to foster access to financial services for lower-income communities across the country. This study provides new evidence on the effectiveness of CRA on mortgage lending by focusing on a large number of neighborhoods that became eligible and ineligible for CRA credit in the Philadelphia market because of an exogenous policy shock in 2014. The CRA effects are more evident when a lower-income neighborhood loses its CRA coverage, which leads to a 10 percent or more decrease in purchase originations by CRA-regulated lenders. Lending institutions not subject to CRA can substitute approximately half, but not all, of the decreased lending by CRA lenders. The increased market share of nondepository institutions in previously CRA eligible neighborhoods, however, was accompanied by a greater involvement in riskier Federal Housing Administration lending. This study demonstrates how different lenders respond to the incentive of CRA credit and how the use of metropolitan division median family incomes can generate unintended consequences on CRA lending activities