Trends in Home Purchase Lending: Consolidation and the Community Reinvestment Act

Federal Reserve Bulletin, Feb, 1999 by Robert B. Avery, Raphael W. Bostic, Paul S. Calem, Glenn B. Canner, Kelly A. Bryant, John E. Matson

Consolidation among banking institutions has substantially changed the structure of the banking industry. Between 1975 and 1997, the number of commercial banks and savings associations declined more than 40 percent. Most of this change was due to mergers and acquisitions, though in some years failures and liquidations were also important. Recent mergers and acquisitions have had particularly sizable effects on the shape of the industry, as many have involved the nation's largest and the most geographically diverse banking institutions.

Over the same broad period, the market for home mortgage lending has changed substantially. Notably, home mortgage lending is no longer primarily the province of banking institutions operating in the communities in which they have banking offices.(1) In recent decades, mortgage and finance companies and banking organizations operating outside their local communities have gained a significant share of the mortgage market.(2) Today, fewer than half of all home mortgage loans extended in any given community are originated by banking organizations with banking offices, in that community.

These changes have fueled debate regarding their effects on the provision of home mortgage loans. One particular concern is that, as a consequence of these changes, lower-income and minority borrowers and borrowers in lower-income and minority neighborhoods may face reduced access to mortgage credit. In part, this concern reflects the belief that a shift away from lending by institutions with local banking offices and acquisitions of small community-based banking institutions by large regional or national organizations may result in a transfer of decision-making authority from those familiar with the needs of local communities to those less knowledgeable about, and thus less responsive to, such needs. This article explores this issue by examining the relationship between consolidation among banking organizations in local markets and changes in home purchase lending over the 1993-97 period. We examine changes in total lending as well as changes in lending to lower-income and minority borrowers and neighborhoods.(3)

Previous research has considered the effects of consolidation on various aspects of banking, including small business lending, product pricing, and the geographic distribution of banking offices.(4) These studies indicate that, in some cases, consolidation may significantly affect the provision of financial services. This article extends the line of research by exploring the relationship between consolidation and lending to purchase homes.

This article also examines a related issue. Banking institutions have a legal responsibility to help serve the credit needs of their local communities--those areas in which they operate banking offices. The Community Reinvestment Act (CRA) of 1977 encourages banking institutions to help meet the credit needs of their local communities, including those of lower-income borrowers and of borrowers residing in lower-income neighborhoods.(5) Because credit availability is believed to be essential to the economic health and vitality of neighborhoods, we also examine the relationship between consolidation and changes in home purchase lending by institutions in those areas where they have CRA responsibilities. Little previous research has been done on this narrower issue.

Until recently, only limited information has been available to systematically assess these issues. The analysis in this article relies on a new, specially constructed database that uses information on mergers, acquisitions, and failures of commercial banks and savings associations and data on the location of banking offices and neighborhood economic and demographic characteristics. These data are combined with data obtained pursuant to the Home Mortgage Disclosure Act (HMDA) for the years 1993 through 1997 on home purchase lending.(6)

OVERVIEW OF THE RESULTS

When measured at the market (county) level, the level of consolidation activity among banking organizations appears to have had little relationship to changes in home purchase lending, both overall and to lower-income and minority borrowers and neighborhoods. This finding suggests that, in general, consolidation has not had significant anticompetitive effects on home purchase lending and that lending to lower-income and minority borrowers and neighborhoods has not been adversely affected by consolidation. This result holds despite the fact that consolidating organizations reduced their home purchase lending substantially in those areas in which they had banking offices. It appears that this reduction was more than offset by expanded home purchase lending by banking organizations in areas where they did not operate banking offices and by independent mortgage and finance companies and credit unions. In particular, consolidating banking organizations expanded their lending dramatically in areas where they did not operate banking offices. Thus, the very organizations that reduced their lending in markets where they operated offices were the organizations that expanded most in other areas. This result suggests that a driving force underlying changes in the home purchase lending market has been a desire by banking organizations to diversify their lending activity geographically.