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October 29, 2004
Is CRA the Right Remedy for Race-Based Disparity in Mortgage Lending?
    by William Baue

A new study finds significant disparity between lending to minorities versus whites, but a Community Reinvestment Act expert questions the focus on CRA as the cure.

Minorities such as African-Americans and Latinos are significantly more likely to be denied for mortgages than whites, according to a new report released last week by the Association of Community Organizations for Reform Now (ACORN). However, ACORN's recommendation to address this problem through the Community Reinvestment Act (CRA) may not represent the most appropriate remedy for racial inequities.

The report, entitled The Great Divide, examines Home Mortgage Disclosure Act (HMDA) data to ascertain trends for lending to minorities and low- and moderate-income (LMI) individuals.

"HMDA data, which is gathered under CRA, records applicants' race, as well their income," said Valerie Coffin, director of ACORN Fair Housing, who authored the report.

The report finds that the disparity between minority and white denial rates fell from 1993 to 1998, but then rose again by 2003 to the same levels they were at a decade earlier. Specifically, the denial rate for conventional home purchase loan applications for African-Americans was 27.6 percent in 2003, 2.2 times the denial rate for whites, which was 12.7 percent. Five years earlier, the ratio between denial rates for African-American (13.7 percent) and whites (7.7 percent) was 1.8. The ratio between Latino and white denial rates experienced a similar (but less pronounced) dip from 1993 to 1998 and resurgence from 1998 to 2003.

While these statistics may be distressing in terms of their reflection of racial inequality, CRA is not necessarily the answer according to Ken Thomas, a Wharton School professor and author of CRA Handbook, a comprehensive guide to CRA.

"The main thing to know about ACORN's The Great Divide is there is a "Great Disconnect" between their primary findings on minority homeownership and CRA, which is income-based, not race-based," Dr. Thomas told

Ms. Coffin acknowledges that, strictly speaking, CRA does not address the race issue, and that fair lending laws and other civil rights statutes deal with the racial impact.

"Although race is not specifically addressed in CRA, taking these other statutes into account, race is relevant, and furthermore, CRA information-collection requirements do address race, therefore race is not irrelevant to CRA," Ms. Coffin told

Dr. Thomas sees this line of reasoning leading down a slippery slope.

"Community groups are flat-out wrong to ask that CRA become race-based, something that could jeopardize the future of this needs-based law," he writes in a 2002 public policy brief published by Levy Economics Institute of Bard College. "[A] race-based CRA proposal would lessen the public policy benefits of the law . . . because limited resources would be diverted from the neediest people and areas to those that may or may not be in need, but are associated with a certain ethnic group."

The ACORN study reports that upper-income (those making 120 percent of the area median income) African-Americans and Latinos are more than twice as likely to be denied for a conventional home loan than whites.

Focusing on the income-based statistics reported in the ACORN study, low- and moderate-income (LMI) lending is growing faster than middle- and upper-income lending. From 1993 to 2003, the number of conventional home purchase loans to low-income and moderate-income borrowers rose by 150 and 120 percent, respectively On the otherhand, the number of such loans for upper-income and middle-income borrowers rose by 108 and 107 percent, respectively.

The report also notes an increase in the percentage of conventional home purchase loans received by LMI communities, from 9.9 percent of loans originated in 1993 to 10.9 percent in 1998 to 15.3 percent in 2003.

"Thus, the proportion of both LMI area and borrower lending increased from 1993 to 2003, mainly due to CRA in my opinion," said Dr. Thomas. "If CRA is properly reformed, and banks are allowed some but not all of the regulatory relief they ask for, we will continue to have such good results."

The Federal Deposit Insurance Corporation (FDIC) has proposed a rule allowing banks with between $250 million and $1 billion in assets to provide only one of the three functions (loans, investments, and services) they are currently mandated to fill for LMI individuals and communities.

ACORN advocates opposition to this reform on the grounds that it would adversely affect not only LMI individuals and communities, but also minority individuals and communities. In its report, ACORN additionally advocates for stronger enforcement of fair lending laws, among many other recommendations for addressing race- and income-based lending disparity.


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