Bank Enforcement Actions and Lending to Minorities
Rimmy Tomy, Associate Professor of Accounting
A large literature explores discrimination in mortgage lending. Yet, we know relatively little about how regulatory measures such as issuing enforcement actions (EDO) can affect bank managers’ incentives to increase lending to under-served communities such as minorities and women. In this project, we explore the link between bank enforcement actions and mortgage lending to under-served communities. Our findings thus far indicate that the share of mortgage lending to minorities and women in banks’ portfolios at the county level increases after the termination of an EDO. Specifically, we find that banks receiving enforcement actions are less likely to deny loans to minority borrowers or to women. Furthermore, we find that following an enforcement action, these borrowers receive incrementally larger loans, and the reasons for loan denial also change. We propose and explore several mechanisms to explain why lending to under-served communities increases after the termination of an EDO. These mechanisms include banks catering to regulators following the enforcement action and responding to increased competitive pressure.
Working paper published in the Journal of Accounting Research