Community Reinvestment Act May Have Deterred Risky Mortgage Lending
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Traiger & Hinckley LLP Study Shows CRA Banks Were Substantially Less Likely Than Other Lenders to Make the High Cost Loans That Helped Fuel the Foreclosure Crisis NEW YORK--(Business Wire)--A Traiger & Hinckley LLP study of 2006 mortgage loan data suggests that the Community Reinvestment Act, a federal law that requires banks to help serve the credit needs of their local communities, including low- and moderate-income neighborhoods, deterred banks from engaging in the kinds of risky lending practices that are provoking the foreclosure crisis. Compared to other lenders in their communities, banks making loans in their CRA assessment areas (CRA Banks) were less likely to make a high cost loan, charged less for the high cost loans they did make, and were substantially more likely to eschew the secondary market and retain high cost and other loans in portfolio. Foreclosure rates were also lower in metropolitan areas with proportionately greater numbers of bank branches. The Traiger & Hinckley LLP study, entitled "The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis," reviewed 2006 home purchase mortgage lending in the nation's 15 largest metropolitan areas: Atlanta, Boston, Chicago, Dallas, Detroit, Houston, Los Angeles, Miami, New York, Philadelphia, Phoenix, Riverside, CA, San Francisco, Seattle, and Washington, DC. The study utilized public data filed pursuant to the CRA and Home Mortgage Disclosure Act (HMDA). "Without the CRA, the foreclosure crisis might have negatively impacted even more borrowers and neighborhoods," stated law firm partner Warren Traiger. "Apparently, the CRA's mandate that banks help serve the credit needs of their local communities consistent with safe and sound banking practices has resulted in CRA Banks making a greater proportion of safe and sound loans than other lenders." Specifically, the Traiger & Hinckley LLP study found that: -- CRA Banks were 66 percent less likely than other lenders to originate a high cost loan; -- The average high cost loan made by CRA Banks was priced 68 basis points lower than the average high cost loan originated by other lenders; -- CRA Banks were more than twice as likely as other lenders to hold originated loans in their portfolio; and -- The higher a metropolitan area's concentration of bank branches, the lower its foreclosure rate. Conclusion To a much greater extent than other lenders, CRA Banks avoided making the types of home purchase mortgage loans that provoked the foreclosure crisis. Unfortunately, the law's impact on the subprime crisis was limited because in the 15 metropolitan areas analyzed, the CRA Banks' share of the mortgage market was less than 25 percent. While some have suggested extending CRA-like obligations to other categories of lenders as a way of prospectively limiting the volume of high cost loans and the problems associated with them, the study speculates that the presence of local brick and mortar branches in a community was at least as important a reason for CRA Banks' better performance than fear of a less than satisfactory CRA evaluation. Although the CRA still has a vital role to play for banks lending in their communities, it is doubtful whether the same benefits can be realized for other lenders without a branch nexus. The complete study is available at www.traigerlaw.com. About Traiger & Hinckley LLP Traiger & Hinckley LLP is a New York City-based law firm that advises financial institutions on compliance with federal and state anti-discrimination laws. The firm's analytical group employs statistical methods including linear and logistic regression analyses to evaluate loan data. Traiger & Hinckley LLP Warren Traiger, 212-752-1161 firstname.lastname@example.org Copyright Business Wire 2008