The Potentially Adverse Fair Lending Implications of the New CRA Rule


There has been much understandable handwringing about the new CRA and its complexity as well as the high CRA exam failure rate predicted by regulators based on the new assessment areas and the higher performance standards embedded in the new rule. But there is a greater potential regulatory threat that goes beyond the CRA performance implications. I am speaking about the Fair Lending implications of the new rule.

As most regulatory compliance professionals today know, redlining is the hottest issue in regulatory compliance today. In October 2021, the Department of Justice announced its “Anti-Redlining Initiative” and a few months later the ripple effect was being felt by banks. During 2022 a record number of referrals for redlining accusations were forwarded from the prudential bank regulators to the DOJ.

What has redlining to do with the new CRA rule?

This Is where the concept of a REMA or “Reasonably Expected Market Area” comes into play. Ever since the regulators began applying the concept of a REMA starting back in 2009 one of the critical considerations has been how a bank configures its CRA Assessment Area. For decades banks have been allowed to circumscribe their CRA Assessment Areas based on the “area a bank can reasonably be expected to serve”. But the new CRA has abolished that reasonable and practical approach and has substituted a mandate that requires “large banks” (today banks with assets of more than $1.564 billion for the last 2 calendar year ends) to incorporate whole counties within their CRA Assessment Areas.

There are sure to be many situations where adopting an entire county may not be practical or realistic. For example, in previous articles I cited the situation in 2021 in Los Angeles County CA which consists of 2,495 census tracts. The data showed that 99 banks operated 1,634 deposit-taking branches. Of those banks 17 “large” banks operated 3 or fewer branches. And 8 so-called large banks operated only 1 deposit-taking facility in the entire county. Until now those banks could designate any part of LA they could reasonably be expected to serve. Now, they must assimilate the entire county. In fact, I’ve seen several cases where banks operate a branch in a county adjacent to a major city and have been accused of redlining because they have not extended enough mortgages in the city in the adjacent county which is outside the banks’ CRA assessment area.

The “all or nothing” rigidity regarding CRA Assessment Area delineation in the new rule will set up many banks for redlining charges based on inadequate “penetration rates” in the minority tracts within their unrealistic assessment areas mandated by the new CRA. I’ve seen evidence of this firsthand which motivates me to write this article. 

Bankers, take note. When a “large” bank delineates its CRA assessment area under the new CRA rule it will need to consider the assessment area configuration impact not only on its CRA performance, but the implications for fair lending and potential redlining issues too. In fact, banks also will need to consider the CRA and fair lending implications of opening a new branch in a county where the bank has no other branches. Will the new branch precipitate unrealistic CRA performance expectations and set up the bank for potential redlining accusations too? These are issues every bank will need to consider in their retail banking services delivery system and strategy. It’s certainly an unintended, but nevertheless potentially real negative consequence of the new CRA rule.

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