Alston & Bird Consumer Finance Blog

CRA

Merrily the State CRAs Roll Along

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A&B ABstract:

While we wait on the final interagency rule from the Federal Reserve, OCC, and FDIC, Illinois and New York are continuing along with their state Community Reinvestment Acts (CRA).

Illinois CRA Developments

Illinois announced that it would hold public hearings, two on March 2, 2023 and a third on March 8, 2023, to discuss revisions to its proposed rulemaking.  The comment period was extended to March 16 to accommodate these hearings and invite further public engagement on their final rule.  The Illinois final rule, unlike the federal final rule, will not only apply to state-chartered banks, but also to state-licensed nonbank lenders and state-chartered credit unions.  To that end, the three hearings are split among the three groups: the Bank Community Reinvestment hearing at 10 a.m. C.T. on March 2, the Mortgage Community Reinvestment hearing at 2 p.m. C.T. on March 2, and the Credit Union Community Reinvestment hearing will be at 1 p.m. C.T. on March 8.  The hearings are to be conducted in person, with dial-in and WebEx accessibility.  The IDFPR published the details for interested attendees in the Illinois Register here.

New York CRA Developments

New York, meanwhile, has updated the New York CRA regulations with additional data collection and reporting obligations in connection with minority- and women-owned businesses (“MWBEs”).  New York revised its CRA statute effective January 2020 to underscore its commitment to serving MWBEs as well as low- and moderate-income communities.  In furtherance to that revision, New York’s Department of Financial Services will now collect data concerning whether a loan or investment benefits MWBEs, in a manner consistent with fair lending laws.  This record collection will enable institutions serving these communities to receive CRA consideration for their activities in their state CRA examinations.  The NY CRA was amended in 2021 to apply to both state-chartered banks and state-licensed non-depository lenders.

Takeaway

It remains to be seen whether Illinois or New York will issue anything further before the prudential regulators come out with the much-anticipated final CRA rule.  Conventional wisdom would anticipate their waiting, but with potential legal challenges to the final CRA rule under consideration by certain banking trade groups, the states may be ready to continue moving forward independently for now and synching back up again once the final federal CRA rules are in effect.

Illinois Proposes Rules Implementing Its Community Reinvestment Act for Banks, Mortgage Lenders, and Credit Unions

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A&B ABstract:

The Illinois Department of Financial and Professional Regulation (“IDFPR”) has issued a notice of proposed rules to implement the newly passed Illinois Community Reinvestment Act (“ILCRA”), aimed at serving the credit needs of low- and moderate-income communities and individuals.  The proposal includes a separate set of rules applicable to state-chartered banks, non-depository mortgage lenders, and credit unions.  Each set of proposed rules address topics that include, among other things, performance tests and ratings by institution size or business model, assessment area delineation, data collection and reporting, and examination procedures. The IDFPR is soliciting comments from interested stakeholders through March 16, 2023 and will be holding three public hearings related to the rules.

What’s New?

The proposal outlines CRA responsibilities and performance evaluation measures for banks and would subject them to a CRA examination by the IDFPR, in addition to their federal CRA examinations.  The rules themselves, however, are essentially the same as under the federal CRA.

Under the ILCRA, non-depository mortgage lenders and credit unions are subject to CRA requirements.  As described in the proposal, credit unions and non-depository mortgage lenders would be subject to a CRA evaluation based on a testing framework that looks similar to the current federal CRA framework, meaning that the IDFPR will examine these institutions under tests that look similar to the current federal CRA tests depending on their operations and asset sizes.

Credit Unions

The proposal’s requirements for Illinois-chartered credit unions look comparable to those for banks under the current federal CRA and the proposal.  Akin to banks, credit unions would have CRA responsibilities in delineated assessment areas, which are communities based on where credit unions have their main offices, branches, and deposit-taking ATMs.  These responsibilities take the form of lending, investment, and service tests based on asset size thresholds and then add resultant evaluation elections depending on asset size.  Additionally, the proposal provides an alternative evaluation framework for wholesale and limited purpose credit unions, involving a community development test, and strategic plan evaluation option.  The lending test includes home mortgage, small business, and small farm loans, though it also adds potential consumer loans, such as motor vehicle, credit card, home equity, other secured, and other unsecured loans, depending on the credit union’s loan portfolio.  Credit unions would also have data collection, reporting, and disclosure requirements, though those requirements are reduced for small credit unions.

Non-depository Mortgage Lenders

Under the proposal, non-depository mortgage lenders licensed pursuant to the Residential Mortgage License Act of 1987 which made 50 or more HMDA-reportable home mortgage loans in the previous calendar year will have CRA responsibilities.  There are a number of key aspects of the proposal specific to mortgage lenders that differ from the rules for credit unions and banks:

  • In contrast to banks or credit unions, CRA activities would be assessed state-wide, not based on delineated assessment areas.
  • The proposal outlines that mortgage lenders would be subject to lending and service tests, but not an investment test. Instead, the proposal states that a mortgage lender that warrants a satisfactory rating can be considered for an outstanding rating based on its level of qualified investments and community development loans, which is essentially the traditional CRA investment test.
  • Importantly, and in contrast to the lending test evaluations of banks or credit unions, mortgage lender performance criteria for the lending test explicitly includes not only the portfolio of loans’ geographic distribution, borrower characteristics, and innovative or flexible lending practices, but also (i) loss mitigation efforts, (ii) fair lending performance, and (iii) contribution to the loss of affordable housing units. These are new areas not contained in the federal CRA, either.
  • Finally, mortgage lenders will also have data collection and reporting requirements, which would include “additional data fields beyond what is required under HMDA.” These data fields are not specified in the proposal.

What’s Surprising?

The proposed regulations implementing ILCRA, as applicable to Illinois-chartered banks, largely mirror the federal CRA regulations applicable to state-chartered institutions.  But those federal CRA regulations are on the precipice of a major overhaul.  As proposed by the interagency Notice of Proposed Rulemaking to the federal CRA, where a bank will have CRA responsibilities, the substance of those responsibilities, the measurement of those responsibilities, and the record keeping and reporting of those responsibilities are slated for significant change under a completely new framework.  Whether those changes will be finalized as currently proposed by the three prudential banking regulators remains to be seen, but the fact that the IDFPR’s suggested framework for bank compliance with the ILCRA is based on a likely soon-to-be outdated set of regulations is surprising.  The proposal does note that the ILCRA regulations are intended to follow the federal standards.  Accordingly, there could be a revision in the works sooner-than-later should the federal CRA regulations change contemporaneously with or soon after the ILCRA regulations are finalized.

Takeaway

Compliance with the ILCRA as proposed would be relatively easy to plan for and implement because it generally applies the current and 28-year-old federal CRA regulations to Illinois banks, non-depository mortgage lenders, and credit unions, as relevant to the type of financial institution.  However, these Illinois financial institutions would be wise to monitor the federal CRA modernization efforts with an eye to the future.  As the ILCRA proposal comment window is open, affected stakeholders should consider voicing any concerns with their future CRA responsibilities.

State Community Reinvestment Acts Reaching Beyond Banks

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A&B ABstract:

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.

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.

Takeaway:

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.

State Community Reinvestment Acts Reaching Beyond Banks

By

A&B ABstract:

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.

Takeaway:

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.