Lending in low- and moderate-income neighborhoods in California: the performance of CRA lending during the subprime meltdown

The current scale of mortgage delinquencies and foreclosures - particularly in the subprime market - has sparked a renewed debate over the Community Reinvestment Act (CRA) and the regulations governing home mortgage lending. On one side, detractors argue that the CRA helped to precipitate the current crisis by encouraging lending in low- and moderate-income neighborhoods (Walker 2008). On the other side, advocates of the CRA point to a number of reasons why the regulation shouldn’t be blamed for the current subprime crisis. ; What has been missing in this debate has been an empirical examination of the performance of loans made by institutions regulated under the CRA, versus those made by independent mortgage banks. The ability to conduct this research has been limited by the lack of a dataset that links information on loan origination with information on loan performance. In this study, we use a unique dataset that joins lender and origination information from the Home Mortgage Disclosure Act (HMDA) reports with data on loan performance from Lender Processing Services, Inc. Applied Analytics (LPS).2 We thus have access to information on borrower characteristics (including race, income, and credit score), loan characteristics (including its loan-to-value ratio, whether it was a fixed or adjustable rate mortgage, and the existence of a prepayment penalty), institutional characteristics (whether the lending institution was regulated under the CRA and the loan source), and loan performance (delinquency and foreclosure).