The Performance and Profitability of CRA-Related Lending.

In November 1999, the U.S. Congress asked the Board of Governors of the Federal Reserve System to conduct a comprehensive study of loans made under the Community Reinvestment Act of 1977. The Board's study focused on the loans' delinquency and default rates--their performance--as well as their profitability. This Commentary reports the results of the study.

Concerns about the availability of credit to lower-income borrowers and communities and to small businesses and farms are long- standing. Over the years, many government programs, such as those of the Federal Housing Administration, have been established to address these concerns. Regulation of private-sector activities also is intended to bolster such lending. The most prominent government regulatory effort to improve access to credit, the Community Reinvestment Act of 1977 (CRA), was designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, consistent with safe and sound operations.

Responding to the CRA, banking institutions have used various methods to expand lending to lower-income customers and those in lower-income neighborhoods, but their approaches fall into two broad types, both typically involving special marketing and outreach. In one approach, lenders have sought additional CRA-related customers who would qualify for market-priced loans using traditional standards of creditworthiness. In the other, lenders have gained customers by modifying their underwriting guidelines or loan pricing. Many banking institutions, especially the larger ones, have established or participate in special programs to foster lending.

Special lending programs vary widely but they often feature more flexible credit-underwriting guidelines than those hoods are difficult to assess, such lending has increased substantially over the past decade or so. For example, home-purchase lending to lower-income households has increased 86 percent since 1993 (compared to about 50 percent for higher-income households). Lending to borrowers in lower-income neighborhoods also has risen sharply (nearly 80 percent) since 1993.

However, despite all this experience, little systematic information has been publicly available about performance and profitability, either for CRA-related lending activities as a whole or for the loans extended under CRA special lending programs.

* Congressional Mandate

In November 1999, wanting to learn more, the U.S. Congress asked the Federal Reserve Board to do a comprehensive study on the performance (that is, the delinquency and default rates) and profitability of loans made in conformity with the CRA. …

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