Mortgage Companies and Credit Unions: New CRA Law

QUESTION
We are a credit union located in Illinois. Recently, we have become involved in developing CRA initiatives for the first time. Non-bank mortgage companies in Illinois are also affected. We have had numerous conversations with mortgage companies in our area about it. This is happening because Illinois has passed a law that requires us to collect and report CRA data.

Here’s a news article on the law: “Illinois Will Now Grade Credit Unions and Mortgage Companies on Their Commitment to Fair Lending.”

A few quotes from this article give you an idea of what I’m referring to.

“But now, for the first time in Illinois, mortgage companies and certain credit unions are subject to standards for community reinvestment just like banks.” …

 

“Only a few other states have their own CRA laws. Generally, state CRA laws and regulations hew closely to federal reinvestment policies and standards, but provide an extra layer of oversight.” …

 

“Meanwhile, Federal Reserve Chairperson Jerome Powell recently voiced his support for expanding the federal CRA to all institutions that make consumer loans.” … 

So, our question is, can you give us some preparatory notes to consider in drafting policies and procedures for the CRA requirements? 

ANSWER
We have clients in Illinois, and we’ve been tracking this legislation since its inception. Consequently, our clients have been getting gradually ramped up in advance of the law being passed. In the last month especially, we have been retained by state credit unions and non-bank mortgage lenders in Illinois to prepare them for the Illinois Community Reinvestment Act (ILCRA) requirements, as outlined in the subject legislation.

What action can you take?

We have subject matter experts and are fully staffed to help you. 

Don’t try to go it alone if you haven’t had substantial experience in Community Reinvestment Act requirements. 

Please notify others similarly situated to contact us HERE. We’ll respond promptly.

What is the new law about?

The federal CRA was passed to address concerns with financial institutions that accepted deposits from their local communities and failed to make loans in the same communities. Under the Illinois provision, the ILCRA does not just pertain to depository institutions. It requires regulators to examine financial institutions for ILCRA compliance and consider their local lending records when they seek approval to open new offices, relocate offices, merge or consolidate, acquire other institutions, or expand their authority. Your HMDA filing is still mandated, so the HMDA and ILCRA filings must be consistently corroborative of each other.

The ILCRA law you referred to was signed into law and became effective on March 23, 2021. It is called the Illinois Community Reinvestment Act (“ILCRA”).[i] The ILCRA requires continuing community investment obligations on covered financial institutions, which include non-depository mortgage lenders.

Take note, the ILCRA does not require financial institutions to undertake any particular activities or make risky loans. The law provides for considerable flexibility in meeting the credit needs of local communities within the bounds of safety and soundness.

The ILCRA applies to covered financial institutions, which include Illinois charted depositories (banks and credit unions), and entities licensed under the Illinois Residential Mortgage License Act of 1987 (ILRMLA), which lent or originated 50 or more residential mortgage loans in the previous calendar year.

How about definitions?

It is worth noting that the ILCRA does not define the terms “lent” or “originated,” and the scope of these terms is currently unclear. I suggest you review these definitions with us in the context of your institution’s loan products. However, how these terms will be defined are significant to some ILRMLA licensees because the ILRMLA license covers entities performing various mortgage market activities, for instance, mortgage brokers, lenders, services, and secondary market purchasers. Having said that, while it’s likely that these terms would cover brokers and lenders, it is somewhat unclear whether these terms also cover servicers and secondary market purchasers unless the terms “originated” or “lent” are defined to include mortgage loan modifications and purchasing mortgage loans.

What are performance tests?

Regulators are required to evaluate each financial institution’s actual performance in meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. Generally, the regulator applies the lending, investment, and service tests to evaluate ILCRA compliance, the first test – the lending test – is the most important for the purposes of sketching out brief response because it focuses on your mortgage lending efforts. 

·        The lending test measures your lending activities by assessing the home mortgage loan originations and purchases, small business and small farm loans, community development loans, and, when appropriate, consumer loans. 

·        The investment test evaluates the extent to which you meet community needs through qualified investments. 

·        The service test reviews the availability and responsiveness of your systems for delivering retail banking and community development services. 

Are there checklists and worksheets?

There are some basic checklists and worksheets that you will want to include in your ILCRA policies and procedures, among which are review sheets for: 

1.       Branch Openings

2.       Public File Audits

3.       Service Activities

4.       Community Development Loans 

How do you meet a community’s financial needs?

The ILCRA expects you to meet the financial services needs of the communities where your institution has offices, branches, and other facilities are maintained. And that means taking into consideration the products and services offered via mobile and other digital channels. Additionally, your institution should help meet the financial services needs of deposit-based assessment areas, including areas contiguous thereto, low-income and moderate-income neighborhoods, and areas where there is a lack of access to safe and affordable banking and lending services. However, these obligations are imposed in a manner consistent with your institution's safe and sound operation.

Let’s drill down a little. Please keep in mind that this is a very complex area of regulatory compliance, so please keep this a high-level overview.

How will you be evaluated?

The Illinois Department of Financial and Professional Regulation (“IDFPR”) will assess the records of each institution that is subject to the ILCRA obligations. To conduct such compliance assessment, the IDFPR will set forth rules which must cover the assessment of the following factors: 

·        Activities to ascertain the financial services needs of the community, including communication with community members regarding the financial services provided; 

·        Extent of marketing to make members of the community aware of the financial services offered; 

·        Origination of mortgage loans, including, but not limited to, home improvement and rehabilitation loans, and other efforts to assist existing low-income and moderate-income residents to be able to remain in affordable housing in their neighborhoods; 

·        For small business lenders, the origination of loans to businesses with gross annual revenues of $1,000,000 or less, particularly those in low-income and moderate-income neighborhoods; 

·        Participation, including investments, in community development and redevelopment programs, small business technical assistance programs, minority-owned depository institutions, community development financial institutions, and mutually-owned financial institutions; 

·        Efforts working with delinquent customers to facilitate a resolution of the delinquency; 

·        Origination of loans that show an undue concentration and a systematic pattern of lending resulting in the loss of affordable housing units; 

·        Evidence of discriminatory and prohibited practices; and 

·        Other factors or requirements as in the judgment of the IDFPR reasonably bear upon the extent to which an institution meets the financial services needs of its entire community, including responsiveness to community needs as reflected by public comments.

What is in the assessment report?

Your institution will get a written report of the examination, parts of which will be made public. It will provide information no less than that provided under the Federal Community Reinvestment Act. You will have an opportunity to review and comment on the report of the examination. The public will have an opportunity for inspection and comments on the public-facing part of the report. The ILCRA requires covered institutions to provide a public notice in the public lobby of each of its offices, if any, and on its website. The public notice has a specific, public declaration language.

The ILCRA report of examination must include the following components: 

·        The assessment factors utilized to determine the institution’s descriptive rating; 

·        The IDFPR’s conclusions for each such assessment factor; 

·        A discussion of the facts supporting such conclusions; 

·        The institution’s descriptive rating and the basis therefor; and, 

·        A summary of public comments.

Is there a compliance rating?

Concerning the compliance rating, there are four such ratings, as follows: 

1.       Outstanding record of performance in meeting its community financial services needs; 

2.       Satisfactory record of performance in meeting its community financial services needs; 

3.       Needs to improve record of performance in meeting its community financial services needs; or, 

4.       Substantial noncompliance in meeting its community financial services needs.

The effect of the compliance rating will cause your company (viz., including parent and subsidiary) when you apply for: 

·        Establishment of a branch, office, or other facility; 

·        The relocation of a main office, branch, office, or other facility; 

·        A license renewal; 

·        Change in control; and, 

·        Mergers or acquisitions.

Importantly, that means dispositively that your record of compliance with the ILCRA obligations may be the basis for the denial of the foregoing applications.

Even non-depository mortgage lenders are covered?

Of course, non-depository mortgage lenders traditionally were not subject to community reinvestment obligations because, unlike banks, they did not make loans using depositors’ money; that is, non-depository mortgage lenders use their own private funds to provide financial services, and for this reason, historically, they were not required to “reinvest” depositors money back in the communities in which they operated. But the ILCRA has changed this standard: it imposes a new community investment (rather than the federal, generic “reinvestment”) obligation on non-depository mortgage lenders.

How will this affect your budget?

As I see it, the ILCRA will most likely result in additional costs related to compliance and examinations, especially for non-depository mortgage lenders. For them, it’s all entirely new. But a can of worms can be opened because of the ILCRA. It may lead to additional fair lending enforcement action against institutions as a result of ILCRA examinations. At this point, much will also depend on how the IDFPR defines assessment areas for ILCRA compliance – leading to a requirement for the institution to conduct marketing and outreach in areas that they did not cover or operate in before.

Will non-depository mortgage lenders ever be exempt?

Non-depository mortgage lenders will need to ramp up appropriately and promptly, as they are certainly going to be included, even though there has been an attempt to remove Illinois charted depositories (i.e., banks and credit unions) from the covered financial institutions. To which I submit: removal of banks and credit unions – don’t count on that happening!

After the passage of the ILCRA, on February 19, 2021, to wit, after the Illinois legislature passed the ILCRA, but before it became law, new legislation was proposed,[ii] which would remove Illinois charted depositories from the definitions of a covered financial institution under the ILCRA.

In any event, if this bill becomes law, it would still leave non-depository mortgage lenders subject to the ILCRA obligations. And, I expect this type of legislation to become law in many states soon.

I suggest that you notify covered institutions to contact us HERE. We’re ready to help.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director

Lenders Compliance Group

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[i] Illinois Community Reinvestment Act (“ILCRA”), Senate Bill No. 1608, Public Act 101-0657, Article 35, was signed into law on March 23, 2021
[ii] House Bill No. 3694