Writing in the Bank's Economic Commentary, economists Robert Avery, Patricia Beeson, and Mark Sniderman show that the presence of many lenders in CRA target neighborhoods is associated with an increase in loan denial rates. The authors find that the cost to each lender of obtaining the neighborhood-specific information necessary to assess a loan application decreases as the lenderís volume of applications from that neighborhood rises. As a result, each lender has more information and lower denial rates in areas where it receives relatively more applications. Because of the comparatively low number of potential loans in low and moderate-income areas, excessive competition means fewer applications and higher denial rates per individual lender.
Avery, Beeson, and Sniderman say that the CRA process may be improved by allowing a few specialized lenders in target areas so that they can achieve the critical mass of applications necessary to exploit economies of scale in neighborhood lending. However, the authors warn, the potential efficiency gains from this arrangement must be weighed against the potential losses if these lenders acquire monopoly power and use it to limit neighborhood lending.
CRA goals are more likely to be realized, the study shows, if lenders organize cooperative arrangements which specialize in collecting and analyzing local market data. These programs may be organized as community development corporations, loan consortiums, or other joint-lending programs and investments which present alternatives to direct lending.
CRA laws obligate each lender to seek loan opportunities in the underserved neighborhoods of its community. Recent revisions to these statutes allow lenders more flexibility in pursuing the goals of CRA legislation. Avery, Beeson, and Sniderman say that lenders should take advantage of these changes to experiment with different vehicles through which they can concentrate their community lending efforts on the desired outcome of CRA - more housing, consumer and neighborhood development financing.
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