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Prof. Haiwen (Helen) Zhang
Professor of Accounting
Carlson School of Management
University of Minnesota

This paper examines the impact of state-level Community Reinvestment Act (CRA) on mortgage companies. Massachusetts (MA) is the first state to set up CRA obligations for mortgage companies. The goal of this rule is to encourage mortgage companies to serve the credit needs of low- and moderate-income (LMI) communities. We find that mortgage companies subject to MA CRA are more likely to exit the MA mortgage market after the regulation. For mortgage companies that stay in MA and are subject to the regulation, we find no evidence of increased loan originations in MA LMI neighborhoods. Instead, these mortgage companies are more likely to purchase and sell loans in MA LMI neighborhoods that qualify for CRA credit and are eligible for government guarantees. Because these loans can always be transferred to Government Sponsored Enterprises (GSEs), the increased purchase/sale propensity in the secondary market may have limited impact on loan originations in the primary market. Consistent with this prediction, our results suggest that the net impact of state CRA on the aggregate mortgage supply in LMI neighborhoods is limited.