Why Are Biased Banks Getting High CRA Marks from Regulators?

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)

Josh B. Silver is a senior adviser with the National Community Reinvestment Coalition, where he produces white papers on the Community Reinvestment Act and fair lending policy and issues.


  1. I would just add to Josh’s excellent article by stressing that many federal bank regulatory agencies are also failing to ensure that banks are affording potential borrowers of different races and national origins with fair and equal treatment. The use of testing makes it possible to obtain credible and objective information about how prospective borrowers of different races and national origins are being treated at the pre-application stage of a mortgage lending transaction. Indeed, I would argue that if testing is not a part of their investigative toolkit, regulatory agencies and many fair lending advocates will continue to miss or fail to detect much of the unlawful racial discrimination that is still occurring in the housing market. The analysis of lending data does not always tell the whole story. Data analysis should be combined with efforts to examine the reality that home buying consumers encounter on the ground. By deploying testers as surrogate consumers, it is frequently possible to observe the unvarnished practices of lenders and determine whether people of all races are being afforded equal information, service, and access to mortgage financing.

  2. Great work. Now how do we use it in the current community benefit agreements in Ohio where these banks are HQ’d? Have we developed best practices that can be used by organizations like ours to accomplish our home ownership mission? I am new to this end of it. So far we have $20B worth of projects which will require 30% lending from them. Included in that is mortgages for 100,000 Ohio home owners who lost their homes from 1999-2014.

  3. The CRA does not address color. CRA is all about income, specifically serving 80% of AMI and below. There are no points given or lost around communities of color. In fact, an unintended consequence actually discourages banks from opening branches in lower income communities. If there is no business, it is not easy for the bank to close the branch. This has happened with several well-meaning banks.

    Banks make money by making loans. I know for a fact that banks are seeking out transactions for lower income borrowers and opportunities for lower income investment. But, the numbers have to work. They are held to a safety and security standard as well and are forbidden from investing depositor funds in marginal or high-risk deals. Put together a good project, you’ll get funded.


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.