A tension exists between a bank meeting its CRA obligations and compliance with other fair lending laws and regulations. This can sometimes present a bank with conflicting priorities.
Although this often goes unrecognized, it is important that an institution understand regulatory expectations for fair lending regulations individually to avoid unintended consequences of well-intended policies or practices.
To illustrate, let’s consider the starting point in CRA lending—the bank’s assessment area. The CRA regulation allows a bank to delineate the area the way it chooses as long as it does not arbitrarily exclude low-to-moderate income (LMI) census tracts. However, regulators have also approached this as a fair lending issue and examine this from a redlining perspective. So the area also cannot exclude minority areas.
From a CRA perspective, the bank wants an area it can reasonably serve and have adequate loan penetration throughout the area it defines as its assessment area. However, the bank has to be careful not to exclude areas that could create redlining issues. On the other hand, including areas that it cannot serve could create issues with respect to CRA and could also burden the bank with having to make additional efforts that are beyond its real market potential in that particular area.
Another example is with raw differences in denial rates. Regulators will sometimes note differences in denial rates between protected and non-protected groups as reflected in the raw HMDA data as a fair lending concern. However, if a bank is aggressively marketing to all segments of the community, they likely will have higher denial rates than a bank that is not.
There is no real way a lender can reach out to areas that suffer from poor economic conditions and not end up having to deny some loan applications. The only way to avoid denials is to only draw applications from applicants that will be approved. This, however, is incompatible with CRA.
These are just two examples, but this is sufficient to adequately show the issue. However, there are a wide range of possibilities as to how a bank may be faced with similar dilemmas. Here are a few points to consider in minimizing these issues:
1. Be Aware of the Potential Conflicts
The most important thing is to recognize that each facet of fair lending does not function in a vacuum. Managing fair lending is multi-dimensional, and interactions between each area must be considered.
2. Recognize the Law of Unintended Consequences
This is the first rule of policy analysis. Actions and changes have both intended and unintended consequences. Always consider how the various areas of fair lending compliance could be affected when instituting changes.
3. When Faced With Tradeoff, Prioritize the Weak Areas and Areas of High Risk
Don’t try to fix things that are not broken, but instead focus on improving the areas that are weakest for your institution or prove to be the most challenging.
