Illinois has a historic opportunity to ensure state banks, state credit unions, and mortgage companies invest mortgage capital equitably.
The ability for the State of IL to hold all lenders accountable for the impact they have on the residents and economy of the State is an important States-rights issue that touches on the traditional American truism that all politics are local. And if politics is about the prioritization and distribution of limited financial resources, the same can be said for the allocation of capital by private institutions.
Good morning. My name is Horacio Mendez and I am the President and Chief Executive Officer of the Woodstock Institute. Woodstock Institute thanks the IL Department of Financial and Professional Regulation (IDFPR) for the opportunity to provide written and oral comments on the Advanced Notice of Proposed Rulemaking (ANPR) under the Illinois Community Reinvestment Act (IL CRA). Woodstock conducts research and advocates for consumer financial protection and community economic development. Our work seeks to combat structural inequities and improve the quality of life in lower-income neighborhoods and communities of color. Our almost 50-year history includes leadership in the drafting and passage of the Home Mortgage Disclosure Act in 1975 and the Federal Community Reinvestment Act (CRA) two years later as well as the advocacy surrounding the recent passage of the Predatory Loan Prevention Act and the IL CRA earlier this year.
My 30-year history in the financial services space includes working on the revision of the CRA’s implementing regulation in the mid-1990s while at the Federal Reserve, and 2 decades of implementing it in various financial institutions ranging from a Venture Capital Bank in Silicon Valley, to an international agricultural lender serving US rural markets, to the 5th largest commercial bank in the world. Added to this, my current role in advocacy allows me to provide input and feedback from virtually every aspect of the industry.
While many of our partners associated with the Illinois CRA Coalition have, or will be providing additional context on priority areas discussed in the ANPR, my comments this morning will focus on 3 areas: (1) how to define a market from which to assess performance; (2) leveraging the evolution of the Federal CRA to the benefit of IL; and (3) who benefits and how.
Let’s start with how to define markets. Much has been made of the fact that there are a variety of lending institutions that are covered by the IL CRA whose markets are defined by certain client characteristics rather than by geography. Related to this are institutions that do not have physical locations to define their market areas. Federal and State regulatory agencies have been dealing with these kinds of entities for decades, and the Federal CRA has created a variety of responsive methods from which to assess the wide variety of financial institutions covered by the Federal law – from banks chartered under the Competitive Equality Banking Act (CEBA), industrial development banks, institutions who serve targeted individuals (like members of the military) and banks who have significant virtual lending and deposit-taking operations throughout the United States.
While formal methodology hasn’t necessarily been created at the Federal level to assess the market for non-traditional lenders, countless exams of these institutions have established strong and important precedents that can be leveraged here in IL. These range from CRA exams of Citicorp to CapitalOne to Bank of the Internet in San Diego. Using these, and countless other examples of how CRA was applied to non-traditional lenders, we see how data can be used to identify the location of lending and deposit-taking activity and thus define a market from which to assess CRA performance.
Thresholds to determine significance and relevance would need to be defined, but a standard of 5% loan or deposit market share threshold has been suggested by various advocacy organizations and discussed internally within the agencies as a possible benchmark at the Federal Level … which serves as an excellent segue to our next topic: leveraging the existing evolution of the Federal CRA.
While we acknowledge the current reality that Washington DC is the final resting place of all good intentions, we are reasonably confident that there will be updated regulations associated with the Federal CRA within the next few years. We recognize that it is not the intention of the IL CRA to create additional regulatory burden on financial institutions who already have an existing obligation under the Federal CRA. However, it was the failure of the Federal CRA to hold national banks accountable for what we see as inequitable lending activity throughout Chicago that highlighted the need for local action. National banks, unfortunately, are given a “get out of jail free card” by the OCC called “Federal preemption” which prohibits the State from holding these national players accountable for what we feel is
inadequate CRA performance in IL.
While investigating the issue of lending in Chicago and throughout IL, we came to the realization that non-bank lenders like credit unions and mortgage companies are now originating the majority of conforming mortgage loans throughout the State and are completely unsupervised as it relates to community reinvestment. It also creates a regulatory environment where like products are not regulated in like ways. The ability for the State of IL to hold all lenders accountable for the impact they have on the residents and economy of the State is an important States-rights issue that touches on the traditional American truism that all politics are local. And if politics is about the prioritization and distribution of limited financial resources, the same can be said for the allocation of capital by private institutions.
As such, we envision a regulatory environment where state-chartered banks would have CRA exams that include State examiners along with the Federal Reserve or FDIC examination team. Looking at the same data in the same manner allows the State to either concur with the findings of these agencies, advocate for different findings based on the interpretation of the data by State examiners, or differ in their findings and release a separate evaluation. As such, any changes to the Federal CRA should be reflected in the parameters of how State examiners assess state-chartered financial institutions. However, it is the right of the State of IL to include common sense factors and expectations that may not find their way into the Federal regulation, and to exclude factors and expectations that simply do not apply to nonbank lenders. We are nicknaming this approach Federal CRA “delta” given the flexibility to add or subtract factors based on size, capacity, business model, applicability and other relevant factors. As such, it is our recommendation that any final IL-CRA rule should reference current FFIEC CRA guidelines with the provision that IDFPR has the authority to add or subtract factors as needed. Many of those factors and expectations can be set forth up front and ahead of the Federal CRA reform effort in order to both maximize the opportunity for feedback and also to inform the Federal discussion.
Finally, and related to the previous point of tailoring implementation to better reflect the diversity of the industry, we strongly advise IDFPR to develop streamlined CRA examination procedures for some of the smaller lenders who support the very communities the CRA has in mind. This is particularly the case for small, volunteer-run, faith-based Credit Unions. The State of Massachusetts provides us with a template of what this could look like. In some cases, the CRA exam of institutions like these consist of a single page of information that was easy to compile and did not create a burden or cost to the institution.
In addition to lessening the regulatory burden of these smaller lenders, we believe that incentives should be written into the final rule for larger covered financial institutions to support these smaller lenders in their important work. State-chartered banks already get Federal CRA consideration for their support of minority depository institutions; the IL CRA should mirror this incentive and broaden its scope.
Woodstock Institute wholeheartedly supports IDFPR’s mission to advance equity in the provision of and access to financial services. We hope our comments to the ANPR, and our continuing advocacy as rules are published for comment, will help the agency achieve its goal. As such, we are available to assist with any additional relevant input as needed.