Economic or cost-benefit analysis of CRA

Much of the CRA discussion on this list has focused on "CRA as a tax." CRA
is viewed as part of the tax price for depository insurance. Thus, the
impact analysis focuses on the total lending dollars leveraged by CRA, now
up to $920 billion dollars in CRA agreements.

A second type of view sees "CRA as a market correction." CRA draws banks
attention to profitable lending that they wouldn't otherwise notice, sort
of affirmative action for bankers. The impact in this case would focus on
loan loss rates for loans leveraged by CRA. Woodstock Institute did a
limited study of loan loss rates for affordable mortage lending and found
these CRA loans to be on a par with conventional homeowner loans, and
substanitally less risky than loans to multi-family properties. Self Help
is building the mother of all databses in this area with its billion dollar
inititiative to purchase (and monitor) the CRA home loans from several
major banks.

Bill Myers

At 12:23 PM 10/26/1998 , Wteleki@worldbank.org wrote:
>While I am on-line, I'd like to know if anyone could lead me to a rigorous
>economic or cost-benefit analysis of CRA. I have been looking for
>something non-polemical for some time and can't seem to find anything that
>puts the politics aside and takes an objective look at the net impact of
>CRA on the country as a whole. It is hard to be an advocate for these
>kinds of programs internationally without a clear economic argument to
>stand on. I'd appreciate it if someone could help me out!
>
>Wendy Jagerson Teleki
>Small Enterprise Unit
>Private Sector Development Department
>World Bank




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Bill Myers writes:

<< Much of the CRA discussion on this list has focused on "CRA as a tax." CRA
is viewed as part of the tax price for depository insurance. Thus, the
impact analysis focuses on the total lending dollars leveraged by CRA, now
up to $920 billion dollars in CRA agreements.>>

Just checking--but aren't we all clear that CRA agreements are an extremely
poor measure of actual performance?

<<A second type of view sees "CRA as a market correction." CRA draws banks
attention to profitable lending that they wouldn't otherwise notice, sort
of affirmative action for bankers. The impact in this case would focus on
loan loss rates for loans leveraged by CRA. Woodstock Institute did a
limited study of loan loss rates for affordable mortage lending and found
these CRA loans to be on a par with conventional homeowner loans, and
substanitally less risky than loans to multi-family properties. Self Help
is building the mother of all databses in this area with its billion dollar
inititiative to purchase (and monitor) the CRA home loans from several
major banks. >>

I have to question this assumption, too. Loan loss rates are only one factor
in assessing profitability. Just because loan loss rates for one product are
comparable, or even better, than a second product, doesn't mean the first
product is s aprofitable, or even profitable at all. I seriously doubt that
"affordable" mortgage lending is as profitable as non-affordable mortgage
lending, when you throw in loan size and the cost of homeownership training.
I'm not saying affordable mortgage lending can't be profitable, I just doubt
it's going to be as profitable. It's strange to me that discussions about
profitability in CD lending, whether it's mortgage lending or small business
micro-lending, so often seem to center on loan loss experience as the sole
measure.

Eric Weaver
Lenders for Community Development
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