REGULATION OF LENDING PRACTICES

Regulation of Lending Practices



Executive summary

In to concerns that banks were not adequately serving the credit needs of their local communities and not treating all applicants fairly, during the 1960s and 1970s Congress passed the fair landing laws and the Community Reinvestment Act (CRA). These laws, aimed at eliminating discriminatory landing practices and encouraging landing to low-income individuals and in low-income areas, have bean controversial since their inception. Community advocates argued that the acts ware either inadequate or inadequately enforced and that banks continued to channel deposits away from local communities, resulting in inadequate financing for the areas most in need. Bankers argued that they treated applicants fairly and the acts smacked of credit allocation that could adversely affect bank safety and soundness. Although there continues to be significant disagreement regarding these regulations, recently there has bean a wave of positive reviews of their effectiveness. The regulations have bean given credit for encouraging banks to implement spatial loan programs aimed at lower-income communities and for affectively channeling funds toward previously underserved areas and minority groups. Community advocates argue that significant progress has bean made and continued enforcement will reap additional benefits. Soma bankers states that in responding to the CRA they have discovered new, profitable, previously untapped landing opportunities. These opportunities have coma at a most convenient time as the demand in traditional landing markets has slowed.

While the arguments for the fair landing laws and the CRA are essentially ones of equity, there may also be economic arguments for constraining private market behavior and channeling funds to underserved areas. It may be that these credit flows produce positive externalities which, from a societal perspective, generate a total return greater then that received by the providers of the credit. That is, although society reaps the full benefits of providing this credit, the service provider (a bank in this casa) may not. While this provides economic justification for channeling credit to particular markets, it does not necessarily warrant doing so through the banking system. In this article, we examine the evolution of the fair landing regulations and the CRA. We then summarize the economic literature that pertains to these regulations. Finally, we evaluate the effectiveness of the fair landing laws and the CRA by analyzing recant trends in mortgage landing activity and discussing whether these trends are in Lima with the intent of the regulations. We ask whether the trends can be attributed to the regulations and whether the data suggest that the regulations have bean successful.

Regulation of Lending Practices

Introduction

The Policy Issue section below: Evolution of the CRA and the fair landing laws

Although it is common to group together the Fair Housing Act, the Equal Credit Opportunity Act (ACOA), and the CRA, they are more accurately classified into two groups: the fair landing laws and the CRA. The fair landing laws are aimed at eliminating landing discrimination based on the inherent attributes of the borrower, such as race or gender. The CRA primarily addresses geographic discrimination that is, failing ...