The Community Reinvestment Act grade deflation reported by American Banker ["
The CRA regulation is very clear — a finding that a bank failed to comply with laws on fair and responsible lending trumps otherwise satisfactory or even outstanding CRA performance. The CRA regulations specifically state that a rating will be "adversely affected by evidence of discriminatory or other illegal credit practices," including but not limited to violations of the Equal Credit Opportunity Act, the Fair Housing Act, the Home Ownership and Equity Protection Act, the Federal Trade Commission Act, the Real Estate Settlement Procedures Act and the Truth in Lending Act .
That the trend toward lower CRA grades is a function of increased regulatory attention to fair and responsible lending is supported by a review of the less-than-satisfactory CRA performance evaluations released in 2010 and so far in 2011. For example, in all but one of the nine unsatisfactory evaluations published by the Federal Reserve, the bank's rating resulted at least in part from a substantive violation of one or more laws governing fair and responsible lending. Similarly, more than half of the FDIC's "needs to improve" CRA assessments resulted from violations of these laws.
The regulators take a broad view of what kind of illegal credit practices mandates a lower CRA rating. And the nexus between CRA and illegal credit practices is tightening.
Although too new to be found in published performance evaluations, an emerging area of fair and responsible lending enforcement directly related to CRA involves redlining — a bank's failure to be equally active in offering credit in minority and nonminority communities. One trigger in these cases is the bank's assessment area delineation. If the regulator finds that an institution has violated the CRA by "arbitrarily excluding" lower-income neighborhoods from its assessment area, that finding can be used to support a redlining allegation. This allegation is typically raised where the delineation includes predominantly middle- and upper-income areas but not adjacent lower-income/minority neighborhoods.
The consequences of being found to engage in an illegal credit practice go beyond the finding's negative impact on a bank's CRA grade and its ability to do a merger or acquisition or even to open a branch. Once a federal banking agency suspects a pattern or practice of discrimination under the equal-credit or fair-housing acts, it is also required to make a referral to the Department of Justice. A DOJ investigation on top of an unsatisfactory CRA rating can severely impact a bank's ability to do business.
So, what can be done? Obviously banks need to ensure that their fair and responsible lending compliance programs are rigorous enough to avoid or at least identify and remedy any illegal credit practices. Ongoing statistical analyses of loan data, file reviews, and internal examination of policies and procedures can help prevent problems.
Banks should also review and, if necessary, redelineate their CRA assessment areas to avoid a finding that lower-income or minority areas are "arbitrarily excluded." This finding often arises when a bank's assessment area carves up whole political subdivisions like counties or cities. Such delineations are now a red flag to regulators, even if the same assessment area was previously approved.
Since CRA examinations usually assess lending activity from several years before, prospective monitoring will not remedy prior problems. However, the CRA regulations do indicate that the impact of an illegal credit practice finding can be mitigated if the bank has robust policies and procedures in place to prevent the practice and has already undertaken voluntary corrective action as a result of a self-assessment.
