3 Simple Strategies to Avoid CRA, Fair Lending, and Redlining Risk
Fair Lending and Community Reinvestment Act compliance are deeply interrelated. The examiners have provided some perspective on what they evaluate and potential risk factors. Read on to learn the three simple strategies to avoid regulatory surprises.
The Interagency Fair Lending Examination Procedures provide guidance on how to understand redlining risk and CRA Ratings. The CRA Ratings are influenced by evidence of discriminatory practices.
Relationship Between CRA and Fair Lending Compliance
According to the Examination Procedures, examiners looks for the following when reviewing for potential redlining risk during a Fair Lending exam:
- “Significant differences, as revealed in HMDA data, in the number of applications received, withdrawn, approved not accepted, and closed for incompleteness or loans originated in those areas in the institution's market that have relatively high concentrations of minority group residents compared with areas with relatively low concentrations of minority residents.”
- “Other patterns of lending identified during the most recent CRA examination that differ by the concentration of minority residents.”
- “Explicit demarcation of credit product markets that excludes MSAs, political subdivisions, census tracts, or other geographic areas within the institution's lending market or CRA assessment areas and having relatively high concentrations of minority residents.”
- “The institution’s CRA assessment area appears to have been drawn to exclude areas with relatively high concentrations of minority residents.”
Based on the “Interagency Questions and Answers Regarding Community Reinvestment” (Questions and Answers) there are several qualitative and quantitative measurements used to determine a Bank’s performance (Lending, Service, Investment). CRA ratings may be adjusted “on the basis of evidence of discriminatory or other illegal credit practices.”
- Question: What is meant by ‘‘discriminatory or other illegal credit practices’’?
- Answer: An institution engages in discriminatory credit practices if it discourages or discriminates against credit applicants or borrowers on a prohibited basis, in violation, for example, of the Fair Housing Act or the Equal Credit Opportunity Act (as implemented by Regulation B).
The bottom line is this: CRA Ratings impact Fair Lending reviews. Fair Lending reviews impact CRA Ratings. Banks cannot afford to ignore either.
Recent Complaint Highlights Redlining Risk
In recent weeks, a redlining complaint has brought Fair Lending and CRA forward in the mainstream press. The New York Times originally reported that the State of New York brought a discrimination complaint forward against a regional bank in Buffalo. According to the complaint, the Bank intentionally redlined, or denied neighborhood access to credit, based on the racial composition of certain neighborhoods. The State has accused the Bank of “adopting a policy of redlining” by drawing a line bisecting the City of Buffalo from its "Trade Area," excluding all of the majority African-American neighborhoods in Buffalo.
The government’s claim is based on the following alleged practices:
- Automatically disqualifying borrowers with properties outside the designated "Trade Area," therefore excluding the minority majority areas - regardless of credit quality;
- Locating Branches and ATMs outside minority-majority neighborhoods; and
- Using advertising mediums that excluded certain prohibited basis groups and geographic areas.
The state used HMDA data to demonstrate the Bank’s applications were under-penetrating African-American communities when compared to census data and peer lending for the market area. The Bank is on record for denying any wrongdoing, and intends to defend against the allegations.
3 Simple Strategies for Avoiding Fair Lending & CRA Compliance Surprises
This complaint brings both CRA and Fair Lending to the spotlight. Here are three simple strategies for avoiding surprises:
- Branch Analysis: Banks should be analyzing the location of their branches/ATMs in comparison to the underlying census tracts (both Minority Majority tracks and Low- and Moderate-Income tracts).
- Loan Analysis: Financial institutions should be analyzing lending data in comparison to census tracts. Geo-code and analyze the lending patterns (both Minority-Majority tracks and Low- and Moderate-Income tracts).
- Data Comparisons to Benchmarks (Census and Peer Group): Finally, financial institutions should be reviewing their application and origination numbers. How do you compare to the underlying census data? How do you compare to market HMDA lending? Does your data imply that you may be under serving any prohibited basis group?
Complaints and settlements can send a clear message to the industry. Based on how the regulators have provided guidance to examiners, it is clear that CRA and Fair Lending are intertwined. Complaints like the one issued in New York should not catch any financial institution by surprise. The bottom line: you need to know your fair lending risk including concerns regarding redlining. Financial institutions should have a strong command of how their branches and lending patterns compare to the markets in which they operate.
As a twist to this complaint in New York, the OCC, Board and FDIC collectively released proposed revisions to the existing CRA Questions and Answers regarding Community Reinvestment (the notice and request for comment was dated September 3rd, 2014). The notice reflects the federal agencies' acknowledgement of “alternative systems for delivering retail banking services” that extend beyond ATMs and brick-and-mortar branches. The notice states, “Given the extent of technological innovation in the delivery of banking services, alternative delivery systems can create opportunities for institutions to better reach and serve low- and moderate-income geographies and individuals.” The industry will want to continue to monitor the developments with both the complaint and the revised Q&A revisions.
In an effort to avoid regulatory surprises, Ncontracts helps our clients review their branch locations, lending patterns, and HMDA data in light of benchmarks.
Related: Lending Compliance Management, Made Simple
- State of New York Complaint against the Bank: State of NY Complaint against Evans Bank
- Popular Press:
- Proposed FAQ - Interagency Questions and Answers Regarding Community Reinvestment Act
- Interagency Fair Lending Exam Procedures (see pages 10-11)
- Federal Register, March 11, 2010 (see pages 11665)
- Ballard Spahr view of the Redlining Lawsuit