When Congress passed the federal Community Reinvestment Act (“CRA”) in 1977 to address redlining, it imposed affirmative requirements on insured depository institutions to serve the credit needs of the communities where they receive deposits. At that time, banks were extending the vast majority of mortgages nationally. However, non-banks have become the dominant mortgage lenders, by some estimates accounting for more than two thirds of residential mortgage loans in 2021.
Indeed, the non-bank mortgage market share has been increasing steadily since 2007, when non-banks were originating approximately 20 percent of mortgage loans. That year, Massachusetts became the first state to extend the scope of its state CRA to non-bank mortgage lenders, notwithstanding the proviso of the federal statute that tied credit obligations to depository activities. Historically, deposits were gathered primarily from areas surrounding bank branches, and thus a bank’s CRA performance responsibilities were likewise focused on those same areas. But today, both lending and depository activities can be conducted nationally. In recognition of the more attenuated connection between bank branches serving the credit needs of communities, the Massachusetts CRA became the first state to impose CRA responsibilities on non-bank lenders.
The Various State CRAs
In March 2021, Illinois passed its CRA which also applies beyond banks to non-bank mortgage lenders, followed shortly by New York in November 2021. (Note that this expansion has not taken mortgage servicers into the fold, as CRA is more focused on an institution’s loan originations and purchases than its loan servicing.) Relatedly, other state CRA statutes apply to credit unions and banks, though not to other financial institutions. Below is a brief update on where various state CRAs currently stand:
- Connecticut. Connecticut’s CRA initially applied only to banks but was amended in 2001 to cover state credit unions as well. It does not cover any other financial institutions, however. Its provisions are similar to the federal CRA.
- District of Columbia. The District of Columbia’s CRA applies to deposit-receiving institutions, which includes federal, state, or District-chartered banks, savings institutions, and credit unions. It is also similar to the federal CRA.
- Illinois. The Illinois CRA applies to financial institutions, which includes state banks, credit unions, and non-bank mortgage entities that are licensed under the state’s Residential Mortgage Lending Act that lent or originated 50 or more residential mortgage loans in the previous calendar year. Following the expansion of its CRA (205 ILCS 735) last year, Illinois solicited comments and facilitated roundtables to assist the Department of Financial and Professional Regulation in developing rulemaking for non-bank entities. In particular, the Department’s August 31, 2021 Advance Notice of Proposed Rulemaking sought comment on whether the assessment areas of these non-bank entities should include the entire state of Illinois. Importantly, the Department has referenced the potential suitability of either the federal CRA rules or Massachusetts’ CRA rules as a model for Illinois. No proposed rule has been published as of the date of this writing.
- Massachusetts. Despite mortgage lender concerns raised today regarding the feasibility and inapplicability of different elements of the general CRA examination framework, Massachusetts has imposed meaningful CRA requirements on non-bank lenders for more than a decade. Indeed, Massachusetts has succeeded in implementing and conducting separate CRA examination processes for banks and non-banks. Yet despite this distinction, Massachusetts CRA exams for mortgage companies remain rigorous.
- New York. In November last year, New York Governor Kathy Hochul signed legislation (S.5246-A/A.6247-A) to expand the scope of the state’s CRA to cover non-bank mortgage lenders. Specifically, the legislation creates a new section, 28-bb of the New York Banking Law, that requires non-depository lenders to “meet the credit needs of local communities.” Further, section 28-bb provides for an assessment of lender performance by the Superintendent that considers the activities conducted by the lender to ascertain the credit needs of its community, along with the extent of the lender’s marketing, special programs, and participation in community outreach, educational programs, and subsidized housing programs. This assessment also may consider the geographic distribution of the lender’s loan applications and originations; the lender’s record of office locations and service offerings; and any evidence of discriminatory conduct, including any practices intended to discourage prospective loan applicants. The provisions of section 28-bb will go into effect on November 1, 2022.
Worth noting also is that while these state CRAs are generally aligned with the federal CRA requirements, the regulations implementing the federal CRA are expected to change. The Federal Reserve Board, FDIC, and OCC are currently working on promulgating a modernized interagency CRA framework. Once the federal CRA regulations change, the state CRAs may follow or risk subjecting their banks and any other covered financial institutions to the burden of complying with two different regulatory regimes.
Much like in Massachusetts, non-bank lenders originating a significant number of loans in Illinois and New York should be developing a CRA compliance strategy that makes sense for their size and business model to comply with the state CRAs. That said, all non-bank lenders would do well to contemplate whether Massachusetts, Illinois, and New York are a harbinger of what is to come. Finally, state CRA covered financial institutions in Connecticut, the District of Columbia, Illinois, Massachusetts, and New York should be planning for potential compliance framework shifts once the federal CRA regulations are revised.