Why Are Biased Banks Getting High CRA Marks from Regulators?

Posted by Josh Silver on July 21, 2016

The Community Reinvestment Act (CRA) statute has a statement of purpose affirming that banks “are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business.” Despite this clear statement, the federal bank regulatory agencies are failing to ensure that banks are responsibly lending to communities of color.

Three federal agencies, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB), and the Office of the Comptroller of the Currency (OCC), conduct CRA exams scrutinizing the level of loans, investments, and bank services in low- and moderate-income communities. The agencies do not explicitly examine lending to communities of color, but CRA exams have a fair lending review section that checks whether banks are discriminating against people of color and women in violation of the Equal Credit Opportunity Act (ECOA) or the Fair Housing Act (FHA). This part of the exam provides an opportunity for community organizations to raise issues of racial disparity and possible discrimination in lending to the attention of CRA examiners.

When CRA examiners find potential ECOA and FHA violations for banks that have assets of less than $10 billion, they bring those cases to the attention of the Department of Justice (DOJ). When banks have assets of over $10 billion, the Consumer Financial Protection Bureau (CFPB) conducts the fair lending review, which is supposed to happen around the same time as the CRA exam.

In order to assess whether fair lending reviews were offering suitable anti-discriminatory protection for communities of color, NCRC reviewed twelve fair lending settlements between 2011 and 2016 involving federal agencies (DOJ, CFPB, and HUD) and two settlements involving the New York State Attorney General. Alarmingly, we found that the bank regulatory agencies made referrals of possible discriminatory activity in just four of the cases. Considering just the federal cases, the federal bank agencies made referrals only one-third of the time. Three of the cases involved a community-based fair housing organization, the Metropolitan St. Louis Equal Housing and Opportunity Council, issuing a complaint or comment letter describing potential discriminatory conduct. This one feisty community organization nearly outperformed three federal bank agencies with exponentially greater resources.

Of the twelve federal discrimination cases, the federal bank agencies gave the banks two “Outstanding” ratings, seven “Satisfactory” ratings, and three “Needs to Improve” ratings. “Needs to Improve” is considered a failing rating. In other words, in the twelve cases in which the CFPB, DOJ, and/or HUD sanctioned banks for discriminatory conduct, the federal bank agencies subsequently issued passing CRA ratings in three-fourths of the cases and downgraded the banks to failing ratings in only one-fourth of the cases.

Since these cases involve egregious allegations of discrimination, the failure of the bank agencies to apply CRA penalties or make referrals the great majority of the time is incomprehensible. For example, one of the New York State Attorney General cases involved Five Star Bank. Five Star Bank would not make loans less than $75,000, significantly constraining lending in communities of color where on average, homes have lower than average values. According to the Attorney General, only 10 of nearly 2,000 home loans issued in Rochester, New York by Five Star Bank from 2009 through 2013 were in communities of color. The Federal Reserve Board gave the bank an “Outstanding” rating in a 2011 exam that examined lending during the same time period that the New York State Attorney General studied. One wonders what the CRA examiner was doing—did they ask about policies such as minimum loan amounts, or conduct cursory data analysis of lending to neighborhoods of color to check for possible discrimination?

Recently, the DOJ and CFPB reached a major settlement with BancorpSouth over redlining, requiring the bank to pay $10 million in restitution. In what should have been a direct violation of CRA regulation recognized by the CRA examiner, the bank designated geographical areas for its exam that included predominantly white communities and excluded neighborhoods of color in Memphis. The bank placed its branches outside neighborhoods of color, and did not market in them. The bank also engaged in price discrimination, making loans with higher interest rates to African Americans than whites with similar financial situations.

There is even more insidious and widespread evidence of discrimination in this case, including a taped conversation of an internal bank staff meeting describing the discriminatory practices. The CRA exam gave the bank a “Satisfactory” rating and the fair lending review section even stated that a fair lending exam had not been conducted yet.

This is complete and abject failure; a CRA exam must never be finalized until the fair lending review is completed.

The fair lending sections of CRA exams are cursory and usually consist of a couple of sentences saying that no violation of discrimination and consumer protection laws occurred. Ironically, before the CRA regulatory reforms in 1995, the fair lending section was more detailed, describing the methodologies used to test for potential discrimination and the product lines scrutinized. Occasionally, the CRA exams also presented more complete analyses of lending to people of color.

Even in the four cases in which the bank agencies made referrals to the DOJ and CFPB, the fair lending review in three of the cases mentioned that an ECOA or FHA violation occurred, but did not provide any details. Only in the case of Ally Bank did the CRA exam mention the specific nature of the violation (discriminatory dealer mark-ups in automobile lending). Details on the nature of the violation, the product line, and the demographic groups impacted is vital so that the general public and community groups can, through such activities as mystery shopping and commenting on bank merger applications, hold the banks accountable for redressing the violations and ensure that the violations are not continuing.

In addition to more transparency and rigor on fair lending reviews, what must be done? NCRC has long advocated for explicitly examining lending to people and communities of color, just as lending to low- and moderate-income borrowers and communities is conducted on CRA exams. The mere process of examining lending in communities of color is likely to reduce instances of redlining, because banks will know that such examinations are forthcoming.

Literally tomorrow, the agencies could vastly improve their fair lending reviews. The proposal to include lending to communities of color on CRA exams would take more work, but abysmal fair lending reviews and failure to uphold CRA’s mandate to ensure access to responsible lending for all communities must be an impetus for reform.

(Photo credit: Steven Lilley via flickr, CC BY-SA 2.0)

About the author more »

Josh B. Silver is a senior advisor at NCRC, where he produces white papers on the Community Reinvestment Act and fair lending policy and issues. He also serves as an expert on affordable housing and community reinvestment. He returned to NCRC after serving as a development manager engaged in fundraising and research at Manna, Inc., a housing nonprofit developer and counseling agency serving the District of Columbia. He also previously served as Vice President of Research and Policy at NCRC for 19 years. In that capacity, Mr. Silver developed NCRC’s policy positions, produced various research studies, engaged in proposal writing and fundraising, and supervised a staff of research and policy analysts. He has written NCRC testimony submitted to Congress on topics including financial modernization, predatory lending, and the effectiveness of the Community Reinvestment Act (CRA) as well as numerous comment letters to federal banking agencies on subjects ranging from the merger application process and the content and accuracy of home and small business data. Prior to NCRC, Mr. Silver worked at the Urban Institute for five years, where he specialized in housing market analysis and program evaluation. He holds a Master’s degree in public affairs from the Lyndon Johnson School of Public Affairs at the University of Texas in Austin.

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