Tag Archives: responsible banking

The CRA Modernization Recommendations by Treasury Department Are Good, Bad, and Yet-to-be-Seen

On April 3^rd, the U.S. Department of Treasury released its long-awaited set of recommendations to modernize the Community Reinvestment Act (CRA). The Association for Neighborhood & Housing Development (ANHD) believes that the Treasury Department document has the potential to lay the ground work for a meaningful dialogue to address some areas of commonly-held concern about the CRA, and we are cautiously optimistic that the recommendations can lead to a productive outcome. But, we have some concerns, and in all cases, the details truly matter.

ANHD fundamentally believes the CRA works. We see its overwhelmingly positive impact on the community development environment in New York City every day. The CRA remains an essential law to leverage bank reinvestment and hold banks accountable to reinvest and serve equitably in the areas where they do business. ANHD appreciates the thought the Treasury put into drafting these recommendations, taking into account the many and varied viewpoints they heard from hundreds of stakeholders, including advocates, bank regulators, and financial institutions. Here are some of the good, bad, and unclear key areas of the recommendations.

We urge the federal regulators to now work closely with the community to craft concrete recommendations, and ultimately regulations, that preserve the core of the CRA and address areas of weakness to take it into the 21^st century.

Summary of Treasury Recommendations

1) Assessment Areas: The geographic areas where banks are assessed on their CRA activities are called “assessment areas”. The Treasury recommendation is to base assessment areas both on branches and where banks take deposits and do substantial business. This recommendation grapples with important changes in the banking world, as more banks do some or all activity online or through other channels outside of a physical branch network. Finding the balance of flexibility, while absolutely maintaining the bank’s commitment to place – which is at the heart of the CRA – and the bank’s commitment not just to the quantity of investment activity but also to the quality of the investment activity and its real impact on each local place must be the goal of this reform. We also are unclear about the intent of the recommendation to allow for investment in “other low- and moderate-income (LMI) communities and identified areas.” Depending upon how it is implemented, we are concerned it could take away from investment in the assessment area.

2) Branches and Services: The Treasury report recommends significantly de-emphasizing the importance of bank branches in CRA exams. We certainly understand that new technology is impacting branch use and appreciate the encouragement to use technology to get people into the banking system. However, branches still matter. Large areas of New York City have been unbanked and underbanked for decades, leading people to use higher cost financial services providers. The CRA must still encourage banks to open in these areas, and we encourage regulators to pay more attention to bank products and the effectiveness of moving people into the banking system. In that context, we are glad the report places a strong emphasis on financial education. The Treasury also recommends expanding the framework of CRA-eligible services. As in other areas, details matter in determining the impact. The focus must remain on services that target LMI people and communities and that are related to community development and financial access/wealth-building, utilizing the expertise of the bank.

3) Community Benefit at Times of Bank Mergers and Branch Openings: ANHD appreciates that the memo recognizes Community Benefits Agreements as a way to demonstrate how a bank will benefit the community, either in connection to a merger application or improving upon a poor CRA rating. There is some confusion as to whether this recommendation applies to all banks, or only to banks that have a less than a Satisfactory CRA rating. We ask the Treasury to clarify that it is a useful tool for all banks, regardless of rating. We are also concerned with the language that appears to discourage comments for banks that pass exams. Given how few banks fail their exams, community input can help assess the local record of the bank and how a merger can better meet the needs of the local community.

Having said that, we disagree that a bank should be able to expand or merge if they fail their CRA exam. As it is, communities struggle to get banks and regulators to commit to a set of activities that will benefit the community at the time of a merger. Overall, 98% of banks pass their CRA exam, and this is one of the only concrete penalties when a bank fails. Any exception to this rule should only be considered if it demonstrably opens up access to banking in underserved communities. Locally, that may mean a new bank in unbanked areas of the South Bronx or Cypress Hills of Brooklyn, for example, coupled with products and services tailored to that community. Absent such a commitment, the expansion should be denied until the bank passes its CRA exam and corrects the behavior.

4) Clarity and Consistency on Exams: Overall, we support the Treasury’s recommendations for greater clarity on qualifying activities, regular communication with examiners, increased examiner training, and more standardized and timely exams. We remain cautious about recommendations regarding expanding the pool of eligible activities, as we do not know which activities they are considering, and we call for room for actual evaluation so the process is not strictly formulaic.

5) Downgrade Policy: The Treasury supports the Office of the Comptroller of the Currency (OCC) memo on fair lending reviews. This would restrict the ability to “double-downgrade” a bank for fair lending or consumer law violations (eg: going from “Outstanding” to “Needs to Improve”), and specifies that downgrades must be related only to lending considered on the CRA exam. However, if a bank’s practices are negatively impacting consumers in the community they are meant to be serving, a bank cannot be considered to be serving the needs of that community. Illegal or abusive behaviors that impact consumer loans or products should be considered relevant to a CRA exam.

6) Performance Context: Currently examiners and banks prepare the performance context, which is drafted to make the case for local needs and is meant to be used to determine if a bank is actually meeting those needs. The Treasury recommends that central community development staff at the regulatory agencies write these. The Federal Reserve Bank of San Francisco set a great precedence for this, and the Federal Reserve Bank of New York is piloting a similar program. ANHD believes this is a strong idea, as long as community input is a key component.

6) Non-bank Lenders: We are very pleased to see the recommendation to include affiliates on bank exams. However, they only call for monitoring the impact of independent nonbank lenders, as opposed to covering it under CRA.

What’s Missing?

Some areas were not mentioned in the memo at all. We outline here a few areas that we hope are addressed in future rulemaking. First, the CRA should no longer be colorblind; it must include an affirmative obligation to equitably serve borrowers and neighborhoods of color. Second, there should be penalties for harmful behavior outside of a fair lending review. If a bank’s lending fuels displacement or hazardous conditions, that should have a negative impact on their CRA rating. Third, we appreciate the recommendation for expanding the definition of assessment areas to include where banks take deposits, or do substantial business, but it’s unclear what will happen with limited purpose banks that are not evaluated on their consumer products as we believe they should be. It could also be beneficial if regulators looked at other loans more consistently, such as consumer loans and non-business credit card loans.

Jaime Weisberg, ANHD’s Senior Campaign Analyst

10 Years After the Housing Crisis: Have We Learned Nothing?

ANHD is extremely disappointed in the U.S. Senate for rolling back the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as “Dodd Frank.” The Senate passed S.2155, which removes key financial safeguards and transparency regulations designed to prevent the kind of financial collapse and damage the U.S. experienced just a decade ago.

This bill is filled with givebacks to the financial industry, while doing nothing to safeguard consumers and tenants from abuses, such as fraudulent accounts and security breaches. This bill also comes at a time when the Consumer Financial Protection Bureau (CFPB) is rolling back its own fair lending examinations and shirking its duty to protect consumers, as per its mandate under the Dodd Frank law.

S.2155 hides key fair lending data for 85% of depository lenders, while exempting some of these same banks from the mortgage rules that ensure consumers have home loans they can actually afford. The Home Mortgage Disclosure Act (HMDA) is one of the most important tools we have to identify lending disparities and outright discrimination. It includes data on the income, race and gender of the borrower, the amount of the loan, and if the loan is high-cost. However, it does not currently capture some of the elements common to the types of mortgages that led to the financial collapse. Dodd Frank addressed this and expanded the data home mortgage lenders are required to report to HMDA, including additional information on race, ethnicity, and the cost and terms of loans to better understand where consumers are being unjustly charged, or denied loans to purchase, refinance, or improve their homes. S. 2155 would exempt roughly 85% of bank lenders that make fewer than 500 loans from reporting this expanded data. We’re already losing data from banks that make fewer than 25 loans as well as the long-standing exemption for multifamily lenders that don’t make any 1-4 family loans.

As the recent Reveal article demonstrates, redlining persists in banks large and small, and all banks should be required to report the expanded data and be held accountable when their lending disparately impacts people of color. A recent ANHD report on 2016 HMDA data also shows how few borrowers of color in New York City are receiving home loans from banks, a number of which will be exempt from expanded HMDA reporting under this bill. While not in New York City, Evans Bank in upstate New York reached a settlement in 2015 for alleged redlining, will be exempt under this bill. Meanwhile, banks under $10 billion in assets are now exempt from the qualified mortgage rule for loans they hold in portfolio.

This bill also reduces scrutiny for large banks. It raises the threshold for enhanced regulatory scrutiny from $50 billion to $250 billion, thus exempting banks within that range from stronger capital and liquidity rules, enhanced risk management standards, living-will requirements, some stress testing requirements, and more. Some banks have long been actively staying below the $50 billion threshold in order to avoid this additional scrutiny, while many others already over $50 billion stand to benefit from the increased threshold. This threshold change would likely empower more banks to merge and expand. In this deregulatory climate, banks are less likely to have strong Community Reinvestment Act (CRA) requirements connected to these mergers, thus leaving consumers and community organizations with fewer banks and fewer resources. 

The bill now goes to the House of Representatives – we must remain vigilant and do all we can to ensure Congress protects consumers over Wall Street.

Jaime Weisberg, ANHD’s Senior Campaign Analyst

This is What a Bad Loan Looks Like

Tenants, community advocates and policy makers have been ringing the alarm bell about bad mortgage lending in mutlifamily buildings. Over the past few years, we have opened up an important dialogue with regulators and banks who understand that bad lending is a direct threat to our neighborhoods. Based on our research and analysis, we define “bad lending” as mortgages that may be speculative because they appear to be underwritten based on the assumption that rent-regulated tenants paying modest rents will leave at an unusually high rate. We also define “bad lending” as loans to developers with a documented history of harassment and displacement of tenants as a business model.

Sometimes, the warning signs of a bad loan are subtle. Sometimes, the warning signs are obvious. Here is an obvious example of what we believe is “bad lending”:

The Real Deal recently reported on a new loan by Signature Bank to Icon Realty to enable them to purchase a building in Manhattan. Even the industry raised an eyebrow at the deal, saying “More than half of the apartments at 199 W. 10th St. are rent-stabilized, though the high price would not seem to reflect low rents.”

Here are two obvious warning signs that make us concerned about the loan:

• The Underwriting: Signature loaned Icon $9.5 million towards a total purchase price of $17.5 million. From the existing publicly available data, this price looks to be nearly 40 times the rent roll. This is more than triple a commonly accepted rule of thumb for a responsible rent-roll multiplier. From what we can determine from the publicly available information, the total debt service coverage ratio of the building may also be significantly below 1.2X, a commonly accepted standard for responsible underwriting indicating that the current income on the property can pay off the mortgage without improperly or quickly raising the rents. The concern is clear: this loan appears to be underwritten based on the assumption that the low-rent paying rent-regulated tenants will be quickly pushed out of the building.

UPDATE as of April 23, 2018: On April 12th, Representatives from Signature bank and Icon Realty told tenants directly that the loan was underwritten to the in-place rents, with a commitment to protect in-place tenants and not charge MCIs.  We and the tenant organizers will be vigilant in holding the bank and landlord to those commitments

• The Borrower’s History: The press reported this year Icon was under investigation by the Tenant Harassment Prevention Task Force, and in late September, they reached a $500,000 settlement in response to their alleged tenant harassment and the hazardous living conditions they created. This joint task force is comprised of the Governor’s Tenant Protection Unit, the New York State Attorney General (NYAG), and New York City’s Department of Housing Preservation and Development (HPD) and Department of Buildings (DOB). Icon was the first landlord they investigated together.  

Prior to the investigation by the Governor’s Joint Task Force on Harassment, tenants across Icon buildings combated these practices collectively as Icon Community United, which is supported by Cooper Square Committee and St. Nicks Alliance. As one Icon tenant in a “construction as harassment” poster-child building told a community organizer: “Icon purchased my building in March of 2015. Since then, my neighbors and I have lived through a constant barrage of demolition construction, causing insurmountable noise, frightening vibrations, and incessant, unconquerable dust. In my home, I’ve experienced extensive water damage and multiple ceiling collapses; in one instance, an entire load of construction debris, which hadn’t been properly disposed of during renovations, fell through my bathroom ceiling. In my eyes, and in speaking to other ICON tenants, their practices since the Attorney General’s investigation remain unchanged.”

As one of the largest multifamily lenders in the city, Signature’s lending practices matter and have consequences when not done responsibly. The tenants in buildings owned by landlords whose poor treatment of tenants have made headlines – including Raphael Toledano, Icon Realty, Ved Parkash, and others – know this first-hand. They have reported facing aggressive buyout offers, lack of heat and hot water, dangerous construction and lead poisoning, rats, vermin, and more.

The principals of best practices for responsible multifamily lending are straightforward: responsible underwriting, appropriate vetting of borrowers, and responding to issues in buildings when problems arise. ANHD and our member groups have been meeting with Signature Bank to discuss these issues, and we appreciate the genuinely meaningful effort the bank has put into these open and productive conversations about best practices in mutlifamily underwriting and lending.

But the recent loans by Signature Bank to Icon Realty and Ved Parkash fly in the face of best practices. ANHD and our member groups call on Signature Bank to commit to the full set of best practices. And where “bad lending” has already occurred, we call on the bank to proactively ensure that tenants in these buildings and others they hold are protected from any future harassment or displacement.

Jaime Weisberg, ANHD’s Senior Campaign Analyst

Cypress Hills LDC Gets at The Heart of The Community Reinvestment Act: Local Banks Must Reinvest Locally

On December 1^st, the East Brooklyn Reinvestment Committee, a group of East New York activists and Board and Staff members of the Cypress Hills LDC (CHLDC) held their annual Bank Reinvestment Forum. This powerful forum really gets at the heart of the Community Reinvestment Act (CRA), which requires banks to reinvest and lend equitably in the local areas where they do business – it doesn’t get any more local than this. This forum has historically focused on the five banks in the Cypress Hills / City Line area of Brooklyn: M&T, Chase, Citibank, Capital One, and City National of NJ (which has since closed). In recent years, it has expanded to include banks throughout Brooklyn Community District 5, which also includes Bank of America and HSBC.

The forum was well attended by community members and representatives from ten banks, the OCC which regulates most of the local banks, NYC Housing Preservation and Development (HPD), Congresswoman Nydia Velázquez’s office, and State Senator Martin Malavé Dilan’s office.  Through public data, bank data, stories, and the experiences of community members and CHLDC staff, the reinvestment committee revealed trends in the lending market, highlighted community needs, and made concrete recommendations for banks to follow.

The overall theme this year was, “Banks are going in the wrong direction”. They found that residential and small business lending among these banks was down from 2015 to 2016, and the percentage of home lending by local banks has been quite low for a number of years now. Worse, City National Bank of NJ left the Banking Development District (BDD) program two years ago and is now closing their branch, further reducing access to banking in an already underbanked area.

This year’s forum focused on four key areas. While the recommendations were very specific to the East New York area, many of them hold true citywide:

• Home Lending: Stagnant wages and rising home prices puts homeownership further out of reach for lower-income New Yorkers. Meanwhile, the existing housing stock is aging and in need of repair. Low-income and senior homeowners need access to capital to maintain and repair their homes. CHLDC outlined the characteristics of an affordable and accessible home repair product and urged all banks to offer a product that incorporates them.
• Small Business Lending: CHLDC supports over 300 small businesses on their end of Fulton Street in Brooklyn and has an active small business association made up of nearly 50 local businesses. They struggle to access credit to purchase property and expand and operate their businesses.  Their recommendations to the banks include affordable mixed-use mortgages for business owners to purchase their buildings; bilingual business banking staff; financial education; planning support and technical assistance; new lending products for small businesses; and working with CHLDC and the small business committee to carry out these recommendations.
• Responsible multifamily lending: After decades of neglect and disrepair in the affordable rent-regulated housing stock, the recent rezoning of Cypress Hills / East New York is now putting residents at greater risk of displacement due to real estate speculation and gentrification. Investors anticipate the area will command higher rents and higher property values as a result of the rezoning. This puts enormous displacement pressure on low-income tenants as landlords seek to push them out to make way for higher paying tenants. Now is exactly the time for banks to pay attention to the lending they do and ensure that it does not facilitate harassment or displacement. The reinvestment committee advocated with banks to commit to ANHD’s set of best practices for responsible lending: Responsible underwriting; proper vetting of landlords; and responding appropriately and proactively when problems arise.
• Access to Banking and a new BDD Bank Branch: The Banking Development District (BDD) program offers publicly-subsidized deposits so that banks are able to increase access to banking in underbanked areas through bank products, loans, investments and services. City National of NJ had a BDD branch for many years. However, they lost that designation and later announced they were closing the branch entirely. CHLDC is looking for another bank to fill in that gap by opening a new BDD branch in the same location. They want this BDD branch and all banks serving this neighborhood to offer affordable home and home improvement loans, a safe affordable bank account that accepts the IDNYC, small business loans and supports, and responsible multifamily lending.

The Community Reinvestment Act is one of most important tools we have to bring banks to the table.  Cypress Hills is an excellent example of a local organization doing just that – literally bringing banks to the table to learn about local needs. We now call on these and all banks in New York City to act by responding to these needs with products, loans, investments and services.

Jaime Weisberg, ANHD’s Senior Campaign Analyst