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Policymakers have struggled for decades to boost lowincome credit access, which is vital for combatting socioeconomic inequality. In 1977, Congress hoped the Community Reinvestment Act (CRA) would fix the problem. The CRA compels banks to lend near their branches—in lowand high-income neighborhoods alike. Still, millions of creditworthy borrowers can’t find affordable loans. What’s the solution?
The CRA, this Article argues, should push large banks to support community banks and other small lenders, including through capital provision, joint ventures, technical assistance, or subsidies. Why? While big banks make nearly all CRA loans, small, community-based lenders reach marginalized groups far more effectively. Economic data indicate this so-called “small-lender effect.” But so far, lawyers haven’t gotten the memo.
Ample legal scholarship has discussed the CRA—often focusing on whether it is “efficient,” in the law-and-economics sense. This Article makes two interventions in these debates, which are each necessary and together sufficient to compel its prescriptions. First, drawing on past economics scholarship and original empirical work, it demonstrates small lenders’ greater ability to underwrite low-income borrowers. Second, it shows that community lenders are stymied, themselves, by separate market failures that keep them from filling the gaps left by big banks. Enlisting large banks to support community lenders would therefore expand credit access and fulfill the CRA’s goals. Even better, it would do so efficiently. This Article’s prescriptions, finally, explain how to refit the CRA for this purpose.
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