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Is Community Reinvestment Act (CRA) lending profitable?: evidence from rating revisions

David M. Harrison (Department of Finance, University of Vermont, Burlington)
Michael J. Seiler (Hawaii Pacific University, Department of Finance, 1132 Bishop Street, Suite 504, Honolulu)

Managerial Finance

ISSN: 0307-4358

Article publication date: 1 July 1999

Abstract

Traces the history of the Community Reinvestment Act (CRA), which requires US lenders to meet the credit needs of their local customers, and presents a study of its effect on profitability. Looks at financial institutions which received revized CRA ratings between 1990 and 1995, analysing their characteristics before and after revision, and finds upgraded banks hold more loans and are likely to be either rapidly growing and/or reaching deeper into the pool of applicants. Goes on to show that interest on CRA‐related loans is lower than on others, i.e. profitability is reduced and risk increased. Concludes that although CRA activities may open new markets and build new skills for lenders, their costs are likely to exceed their benefits for most institutions.

Keywords

Citation

Harrison, D.M. and Seiler, M.J. (1999), "Is Community Reinvestment Act (CRA) lending profitable?: evidence from rating revisions", Managerial Finance, Vol. 25 No. 7, pp. 3-18. https://doi.org/10.1108/03074359910766028

Publisher

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MCB UP Ltd

Copyright © 1999, MCB UP Limited