Earlier this afternoon, I explained at length why the long delay between the 1977 passage of the CRA and the mortgage boom didn’t absolve the law from playing a role in loosening mortgage standards. After that post, I came across a 2004 newsletter from the San Francisco Federal Reserve that explains why the CRA became much more dangerous “effective” in the 1990s.
While the results in these studies are consistent in some respects with a role for the CRA in narrowing any gap between LMI and other home purchase lending, in one particular respect they call that role into question. If the CRA did help narrow the gap between LMI home purchase lending and other home purchase lending during the 1990s, why didn’t it succeed before the 1990s in effectively eliminating the gap?
Changes related to LMI access to credit
Three changes in the late 1980s and the 1990s may help explain a delay in the CRA’s effectiveness. First, in 1989, the CRA was amended to require public access to CRA examination evaluations and performance ratings. This likely helped motivate banks to comply with the CRA in order to avoid adverse publicity. Second, and perhaps more importantly, in 1995, the CRA evaluation process increased the emphasis on actual lending and decreased the emphasis on banks’ documentation of their efforts to assess community needs. Third, advances in computer and financial technology during the 1990s likely reduced imperfect information problems that may have impeded LMI lending. During this period, credit evaluation techniques and data improved with the increases in computer capacity, computer speed, and accessibility of large stores of financial and demographic information. Once imperfect information problems were sufficiently reduced, LMI lending could grow at a relatively quick pace.
A prominent role for technological change in encouraging LMI lending does not preclude a role for a strengthened CRA. For example, the existence of a strong CRA may have given financial market innovators sufficient incentive to use technological advances for CRA-relevant applications, knowing that, with so many banks subject to the CRA, economies of scale could be realised. Similarly, some observers credit the CRA with having provided the impetus for the development of an improved infrastructure for the financing of affordable housing construction, an improvement that would have been cost effective only on a large scale.
To re-iterate: the San Francisco Fed is explaining how the changes to the CRA and its enforcement increased low income lending. Much of that increase was accomplished by lowering lending standards. So CRA defenders should just quit it with the arguments about 1977. They’ve been completely discredited.