Bridging the Gap to Scalable Community Reinvestment Lending Programs

Roberto G. Quercia
Sarah Riley
University of North Carolina at Chapel Hill

The Community Reinvestment Act requires commercial banks and savings institutions to help meet the credit needs of borrowers in their communities, including low- and moderate-income neighborhoods. The CRA has been controversial since its enactment, with calls for both repealing and expanding it. One rationale for expanding CRA lending activities is the distinction between conforming and nonconforming CRA lending, and the fact that a large secondary market exists for the former but not the latter, essentially creating a dual market. In this market, marginal borrowers potentially face higher borrowing costs that may be disproportionate to their actual credit riskiness, can only obtain loans with alternative features that may increase default risk, and may suffer from predatory lending practices. However, not much is known about the lending risks associated with the nonconforming CRA segment of the market. In this article, we summarize the lessons learned from one large nonconforming community reinvestment mortgage program and provide insight into how the challenges associated with special community reinvestment lending might potentially be managed on a larger scale, via increased capital reserves, a mortgage insurance mechanism, and enhanced market liquidity in the special community reinvestment product space.