Do CRA agreements influence lending patterns?

This article considers the broader impact of Community Reinvestment Act (CRA) agreements-bank pledges to extend a certain volume of lending to targeted groups and communities-by examining whether they are associated with changes in lending to lower-income and minority communities in the markets where they are initiated. We find the number of newly initiated CRA agreements in a county to be associated with significant increases in CRA, minority and overall conventional mortgage lending in a county over a three-year period. The results are consistent with the view that the increases in lending represent new lending, with some evidence suggesting that the increases in lending are relatively short-lived. Overall, the results are consistent with the notion that lenders view CRA agreements as a form of insurance against the potentially large and unknown costs associated with fair lending violations, poor CRA performance ratings and adverse publicity from CRA-related protests of mergers or other applications. The results are also consistent with the view that the effectiveness of CRA agreements in increasing lending activity is ultimately determined by the persistence and sophistication of community groups in monitoring compliance with CRA agreements.