The Life Cycle of a Bank Enforcement Action and Its Impact on Minority Lending

This paper studies the role banking supervision plays in improving access to credit for minorities by investigating how enforcement decisions and orders (EDOs) affect bank borrower base. Despite declines in most component portfolios, we find that bank-level residential mortgage portfolios remain relatively unchanged after an EDO. We document significant changes in the underlying demographic mix of residential mortgage borrowers: after an EDO's termination, banks significantly increase residential mortgage lending to minorities. EDO banks are also less likely to deny loans to minority borrowers, and their reasons for loan denial change. We propose several mechanisms to explain why lending to minorities might increase after an EDO and find evidence consistent with EDO banks' improvements due to the enforcement process expanding lending to minorities, as well as banks catering to regulators after EDO termination.