Study Finds CRA Banks Less Likely to Issue Subprime Loans

A recent study by Traiger and Hinkley LLP of 2006 mortgage loans in the nation's 15 most populous metropolitan statistical areas has found that banks that are subject to the Community Reinvestment Act were two-thirds less likely to originate high cost mortgage loans for the purchase of an owner-occupied home than other types of lenders and were 58% less likely to make high cost loans to low and moderate income borrowers.

In the Boston MSA the difference was even greater: only 4% of loans originated by CRA lenders to low and moderate income buyers were high cost, compared to 18.8% of loans originated by other lenders. The study noted that in addition to offering better terms on average (including lower average interest rates on high cost loans), CRA lenders denied a lower percentage of loan applications overall than other lenders. It noted that these differences may be due to the fact that CRA lenders are more than twice as likely to retain loans they originate in their own portfolio. For example, CRA lenders retained 42% of their loans to low and moderate income blrrowers, while other lenders retained less than 19%.

The study also found that the presence of CRA bank branches is strongly negatively correlated with foreclosure rates (the more branches in an area, the lower the foreclosure rate). The authors theorize that the presence of branches makes it easier for borrowers to apply for conventional loans and that the CRA mandate also encourages outreach and good underwriting.

http://www.traigerlaw.com/news/study_finds_cra_banks_less_likely_to_issue_subprime_loans_chpa_02-07-08.pdf