December 26, 2012

SHOCKER: Study Says Community Reinvestment Act Induced Banks To Take Bad Risks.

Specifically, the Community Reinvestment Act and related policy pressures are pointed to as culprits, part of a government effort to extend home-ownership in lower-income neighborhoods. Now comes a new study from the National Bureau of Economic Research that says, quite bluntly. that the CRA played a major role.

In the academic world, mealy-mouthed delivery of even powerful conclusions is the norm, so it’s refreshing to see authors Sumit Agarwal, Efraim Benmelech, Nittai Bergman, Amit Seru answer the title’s question, “Did the Community Reinvestment Act (CRA) Lead to Risky Lending?,” with the clear, “Yes, it did. … We find that adherence to the act led to riskier lending by banks.”

It’s not nice to violate Reynolds’ Law.