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The three-year experience with the community reinvestment act

  • Economics


The Three-Year Experience with the Community Reinvestment Act NORMAN N. BOWSHER r ~ RE DIT is a scarce commodity. As lenders allocate available hinds on the basis of a van etv of considerations, including price (interest rates), abil- ity to repay, maturity of the loan and costs of servic- ing, it is generally difficult fbi an outside observer to determine why one loan application is refused while an apparently similar one is accepted. During the 197Os, banks and thrift institutions were charged with redlining in allocating credit. Many charged that lenders, in essence, drew a line (presumably red) around certain areas on a map and deliberately reduced the supply of mortgage and other credit to residents of those areas. Redlining was credited with both tin fairly discriminating among those seeking credit and hastening the ceo— nomic decline of the affected areas. Lenders, the- oretically, did this because they were shortsighted, bigoted or insensitive to the needs of these mdi— viclu als and communities .~ In response to such charges. Congress passed the Community Reinvestment Act (CRA), effective November 6, 1978, to encourage financial institu- tions to meet the credit needs of their local com- munities Tb is article discusses redlin lug and examines the CRA experience during the three years of its existence. Since a study by the Council of State Planning Agencies has recommended enactment of Take the ~Ione,j and Run! Red!iaiag ui Brooklyn (New York Public Interest Group, Inc., 1976). pp. 13-16 and Redhined: A ‘Vatk) a! S n jr c’ p 1)1/ ,\a tic)) a / Pea j, let Aetia of Ma rtgage Lear!- mr Policies in the Uniter! States, October 1976 (U.S. Senate I Icarings, November 23, 1976. pp. 154—87~. a law similar to the CRA, hut aimed at increasing credit to small businesses in the bank’s community, this is an appropriate time to review the CRA experience.2 NI .ARKF~7.TSAN ) Ti I:t~i.).i :,l. NI N C .lIItCtfl..G1fli.CS’ RI :tIc.~.rttr(iVQL’m2diflf~ The purchase of a home is typical

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