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Cascade: No. 57, Spring 2005

Spotlight on Research: CRA and Racial Housing Patterns

It has been 28 years since the enactment of the Community Reinvestment Act (CRA). CRA encourages financial institutions to meet the credit needs of the local communities they serve, including low- and moderate-income neighborhoods, consistent with safe and sound operating procedures. CRA was a response to lenders' failure to provide adequate credit in inner city communities — which were poor and overwhelmingly minority — and also part of an overall effort to promote fair lending.1 According to one report, CRA has been credited with generating $1.7 trillion in new loans to economically distressed areas.2 CRA empowered several bank regulatory agencies — the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the Office of Thrift Supervision — to monitor and rate how effectively lenders adhere to the legislation.3 These agencies have recently proposed changes in the rules underlying CRA examinations.

In the wake of potential changes to CRA regulations, it might be instructive to consider what CRA has accomplished. A number of studies offer evidence that CRA is achieving its stated objective of increasing mortgage and other loans to minority borrowers and low-income neighborhoods.4 However, recent research has focused on a different aspect of CRA's impact. Instead of centering on the increased availability of credit to minorities in low-income communities, this line of inquiry explores whether CRA's benefits enable minorities to gain access to traditionally white neighborhoods. What follows is a summary of the findings from a study by Samantha Friedman of Northeastern University and Gregory Squires of George Washington University.5

Theories of Residential Patterns and Racial Mobility

Friedman and Squires cite two factors that help explain the lack of studies to date dealing with CRA's influence on minorities gaining access to white neighborhoods. First, previous studies have focused more on the flow of credit to minorities and less on the racial/ethnic composition of the neighborhoods in which they settle. Thus, their main concern was with CRA's economic rather than racial effects. Second, it wasn't until the 1995 revision of CRA that the issue could be studied directly. In 1995, the spatial emphasis of CRA was altered. Lenders would receive CRA credit for loans made not only to low- and moderate-income areas but also to low- and moderate-income borrowers regardless of the economic status of their neighborhoods. The latter made it possible to track minority borrowers residing in predominantly white neighborhoods.

Friedman and Squires rely on several theories of segregation and residential mobility drawn from the field of sociology to investigate the variation in minority access to predominantly white neighborhoods. One set of theories has the common theme that minorities'access to predominantly white neighborhoods is linked to their personal circumstances as related to income, wealth, and personal preferences. Moreover, these models suggest that the desire for access to largely white neighborhoods is motivated by the prospects of gaining more amenities and the greater potential for accumulating wealth. Consequently, these models imply that “metropolitan areas with relatively larger shares of more affluent minorities should have a larger proportion of minorities residing in predominantly white neighborhoods than metropolitan areas with comparatively lower shares of affluent minorities.” Friedman and Squires refer to these models as the economic/ecological perspective.

Another model offers an alternative perspective known as place stratification. It “maintains that a hierarchical ordering exists among groups within society, and that more advantaged groups use their power to maintain social and physical distance from the least advantaged groups.” Thus, the advantaged groups will seek to segregate themselves from those that are least advantaged. In the study's parlance, effective residential segregation between white and minority neighborhoods limits minorities'opportunities to relocate to largely white areas.

Furthermore, the presence of large minority populations tends to encourage whites to more actively pursue policies that will perpetuate the residential segregation. Friedman and Squires point to some policies used in the past for this purpose, such as restrictive covenants, land-use regulations, and zoning ordinances. Thus, it implies a negative relationship between the size of the minority population and their access to predominantly white neighborhoods. All told, this perspective underscores the continuation of a “dual housing market” where whites and minorities are directed to separate neighborhoods.

However, both perspectives do not account for public policies designed to enforce fair lending and fair housing, which, in turn, might facilitate minorities'access to largely white neighborhoods. Even if such policies are taken into account, the question becomes “whether minority access to traditionally inaccessible neighborhoods is due to improvements in their socioeconomic status, or to better enforcement of the Fair Housing Act and a lessening of the existence of discriminatory barriers.” To examine this question empirically, Friedman and Squires believe that, given the sociological knowledge of racial/ethnic inequality, an explicit link is needed between fair lending and fair housing policy and home-buyer mobility. They think CRA is that link.

Data and Methodology

Friedman and Squires use two databases for their analysis: the 2000 Home Mortgage Disclosure Act (HMDA) reports and the 2000 census. Since the authors want to focus on single-family home buyers, they limit their analysis to conventional loans originated to purchase one- to four-family homes, the HMDA category that best suits their purposes. Friedman and Squires acknowledge that restricting their examination in this way precludes FHA and other government-insured loans, which typically go disproportionately to minority borrowers. This limitation, they say, likely understates the possible link between CRA and minority access to traditionally inaccessible neighborhoods.

The authors use univariate, bivariate, and multivariate statistical techniques in their analysis.6 In the multiple regression analysis, Friedman and Squires estimate separate regressions for blacks and Latinos to examine the impact of CRA coverage on minority access to predominately white neighborhoods in designated metropolitan areas while controlling for key influential variables. Their dependent variable is the proportion of conventional home-purchase loans originated to blacks and Latinos in largely white neighborhoods. This dependent variable is regressed on explanatory variables associated with the economic/ecological perspective and place stratification models as well as CRA's influence.

Included in the first two categories are the following variables: the (log of the) average income of the minority group; the (log of the) population size of the metropolitan area; a dissimilarity index to reflect the extent of residential segregation; the proportion of the minority group in the metropolitan area; the proportion of the population residing within suburbs in the metropolitan area; and two variables that capture the housing supply in the area, namely, the proportion of occupied housing units within each area that are owner-occupied and the number of owner-occupied housing units “for sale only” in the area divided by the sum of the total number of owner-occupied housing units and the number of vacant units “for sale only.”

The third category represents the key independent variable and is measured by the proportion of loans within the metropolitan area in 2000 that were originated by CRA-covered institutions.7 The authors analyze 101 metropolitan areas in the U.S. that have a total population of at least 500,000 and at least 5,000 blacks and Latinos.


Friedman and Squires find that the share of home-purchase mortgage loans by CRA-covered lenders has a positive influence on the share of blacks and Latinos residing in predominately white neighborhoods, even after socioeconomic and ecological factors are taken into account.8 More specifically, they discover that a 10-percentage-point increase in the proportion of loans by CRA-covered lenders results in a 2-percentage-point increase in the share of black home buyers and a 5-percentage-point increase in the share of Latino home buyers locating in largely white neighborhoods.

However, their results are not without caveats. Friedman and Squires acknowledge that CRA-covered lenders may be concentrating more of their lending in white communities, since lenders not covered by CRA may have more of a foothold in minority neighborhoods. Moreover, the findings may be influenced by the fact that CRA covers all federally insured depository institutions but not credit unions or brokers and mortgage bankers. However, they point out that the evidence suggests that CRA has had a “halo effect,” whereby it influences the behavior of lenders not under its jurisdiction.9

These caveats notwithstanding, Friedman and Squires conclude that the evidence suggests that the “CRA has favorably impacted the ability of minority households to purchase homes in traditionally inaccessible (i.e., predominately white) communities.”

  • 1 Other major legislative initiatives that preceded CRA but shared the same goal included the Fair Housing Act of 1968, the Equal Credit Opportunity Act of 1974, and the Home Mortgage Disclosure Act of 1975. They all sought to combat discrimination against minorities.
  • 2 “Banking on Local Communities,” New York Times, April 15, 2004.
  • 3 CRA ratings are important to banks and thrifts, in part, because their record is taken into account by regulatory agencies when the institutions apply to open a new branch or merge with or acquire another financial institution.
  • 4 See Joint Center for Housing Studies, 2002, The 25th Anniversary of The Community Reinvestment Act: Access to Capital in an Evolving Financial Services System, Cambridge, Mass.: Joint Center for Housing Studies; Robert E. Litan, et al., 2001, The Community Reinvestment Act After Financial Modernization: A Final Report, Washington, D.C.: U.S. Department of the Treasury; and Susan Haag, 2000, “Community Reinvestment and Cities: A Literature Review of CRA's Impact and Future,” Washington, D.C.: Brookings Institution Center on Urban and Metropolitan Policy.
  • 5 “Does the Community Reinvestment Act Help Minorities Access Traditionally Inaccessible Neighborhoods?” forthcoming in Social Problems.
  • 6 Only the results of the multivariate analysis are reported here. For other results, see the full study.
  • 7 CRA-covered institutions are those whose loans are monitored by one of the following: the Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision.
  • 8 Since Friedman and Squires use the entire population of eligible cases instead of a sample, inferential statistics are not necessary in their analysis.
  • 9 See Anne Shlay, “Influencing Agents of Urban Structure: Evaluating the Effects of Community Reinvestment Organizing on Bank Residential Lending Practices,” Journal of Urban Affairs 35 (1999), pp. 247-78.