Editor's note: This article is one in a three-part series analyzing the impact of bank branch closures in the U.S. For a piece analyzing how closures are disproportionately affecting majority-black communities, click here. For a piece looking at the impact on a small, rural community in North Carolina, click here.
Regulators are rewriting the Community Reinvestment Act, and federal prosecutors have pulled back on fair lending enforcement at a time when majority-black communities are losing far more of their branches than all other communities.
An S&P Global Market Intelligence analysis of branch closures and openings between 2010 and 2018 found that majority-black areas have lost more branches than any other demographic, including areas with declining populations and rural, sparsely populated communities.
Regulators are actively reconsidering the law, and there have been no fair lending enforcement actions against banks since President Donald Trump took office. It is unclear what changes will emerge from the CRA review, but an Office of the Comptroller of the Currency spokesman said the agency wants to provide incentives to promote investment and banking services "where they are needed most."
The CRA was enacted in 1977 in an effort to prevent redlining, an illegal practice in which banks refused to lend in certain minority or low-income neighborhoods. The term originates from some lenders' practice of using a red pencil to outline these areas.
"If you go back to the purpose of CRA, part of it was to stop redlining and making sure the banking services are delivered to everyone equally," said Thomas Curry, who was Comptroller of the Currency between 2012 and 2017 and is now a partner at law firm Nutter McClennen & Fish. The Comptroller's office, or the OCC, is one of the regulators in charge of CRA enforcement.
But the legislation makes no mention of race. Rather, it calls on regulators to evaluate whether a bank is "meeting the credit needs of its entire community, including low- and moderate-income neighborhoods."
Even with the CRA's focus on low- and moderate-income, or LMI, areas, those communities have lost more of their branches, roughly 11.9%, than middle- and upper-income areas, which have lost 10.0% of their branches. Closure rates for the nation’s two largest banks — JPMorgan Chase & Co. and Bank of America Corp. — are also higher in LMI areas. Those two banks have also had the highest branch closure rates in majority-black communities compared to the rest of the industry.
Both banks have "satisfactory" CRA ratings. More than 99% of banks have "satisfactory" or "outstanding" ratings, as of June 3.
"[Examiners] should be sensitive to any opening and closing strategies that could give rise to an inference of redlining. On the CRA front, where a bank opens and closes its branches may not receive immediate scrutiny by the bank regulators," Curry said.
Branch locations are just one part of the CRA exam. There are other tests on investment and lending activity. JPMorgan and Bank of America both have community investment initiatives that have supported low-income communities and invested in minority-owned businesses.
Regulators give banks credit for branches that are near, but not actually in, low-income communities, whereas S&P Global Market Intelligence's analysis only considered branches within the geographic boundaries of a census tract. The OCC's most recent CRA exam for JPMorgan graded its branch footprint in 29 of 32 examined areas as "good performance" in "most [areas,] after consideration was given to those branches in middle- and upper-income (MUI) geographies that were in close proximity or near to LMI geographies."
The OCC called the accessibility of Bank of America's branches "excellent" in its most recent exam, also giving credit to some middle- and upper-income branches that were near LMI areas. That exam did not consider most of the bank's closures analyzed by S&P Global Market Intelligence because it reviewed data through 2011 year-end.
OCC guidance previously stated that it would conduct a CRA exam every three years. In 2018, the regulator issued a bulletin that pushed exams to every four years for large banks with more than 30 rating areas. An OCC spokesperson said Bank of America's exam began in September 2017 and is still in progress, evaluating data from 2012 through 2016.
JPMorgan's most recent exam reviewed data through 2013 year-end. JPMorgan's next CRA exam will begin this year, evaluating data from 2014 through 2018, the spokesperson said.
Fair lending enforcement pullback
While the CRA does not examine branch presence in minority communities, the metric can be the basis for a fair lending action. In 2015, the Justice Department did just that, levying a $5.5 million penalty against Hudson City Savings Bank for failing to have branches in majority-black and majority-Hispanic communities. Since Trump took office, the Justice Department has not pursued a fair lending case against a bank.
Enforcement actions can be brought under either the Equal Credit Opportunity Act, which requires lenders make credit equally available to all creditworthy customers, or the Fair Housing Act, which requires mortgage lenders not discriminate in extending housing-related lending. Compliance documents from the FDIC and the Federal Reserve indicate that insufficient branches in minority communities represent a redlining risk factor.
In Trump's two years in office, prosecutors have filed two fair lending cases, or 1 per year, and zero cases against a bank, according to the Justice Department's website. Under President Barack Obama, the DOJ filed 44 fair lending cases, or 5.5 per year, with most of them targeting banks or banking subsidiaries. Under President George W. Bush, the DOJ filed 11 fair lending cases, or about 1.4 per year, mostly against banks.
Fair lending enforcement actions can develop from consumer complaints, agency investigations or bank examinations by regulators such as the OCC, said Richard Gottlieb, a partner who represents financial institutions for Manatt Phelps & Phillips LLP, a law firm.
"If you were a bank operating during the Obama administration, you might have seen a referral to the Department of Justice [from a bank examiner]," Gottlieb said in an interview. "That's not happening at all here. There hasn't been a single, to my knowledge, referral to the Department of Justice since Trump. Not a one."
CRA rewrite underway
Banks have shuttered thousands of branches because consumers are using them less, increasingly opting for digital alternatives. That has encouraged regulators to consider a revamp of the CRA, a move that consumer advocates worry could lead to even more branch closures.
Joseph Otting, a former banker who was appointed by Trump to lead the OCC, has led the effort to make changes to the CRA.
Otting said in June 2018 that he had "never observed" discrimination in his time as a banker, a statement he clarified as his personal experience while adding that he believes discrimination does exist. One of his deputies said at a December 2018 conference that banks with "unsatisfactory" CRA ratings can now pursue M&A, something they were not previously able to do. Otting in August 2018 launched the rulemaking process to reconsider the law.
While industry leaders and consumer advocates alike acknowledge the CRA test is outdated, some think that relying on digital services will be insufficient for some communities. Research has shown that branches are still critical for some services, as a recent Federal Reserve study found that banks without a local branch were much less likely to originate small-business loans in that community. Some rural areas also lack reliable, speedy internet connectivity.
A group of liberal state attorneys general wrote a letter as part of the CRA rulemaking process, arguing that some of the OCC's ideas would in fact weaken the law. Scott Astrada, director of federal advocacy for the Center for Responsible Lending, said he is particularly concerned about proposals to de-emphasize the importance of the location of physical branches.
"They're relying on the narrative that fintech has supplanted the physical branch experience or can supply the community's credit needs, and a lot of [the research] we've seen disputes that," Astrada said.
From the industry perspective, banks are lobbying regulators to de-emphasize the role of physical branches in CRA exams. JPMorgan suggested a change to the service portion of the test to better reflect the bank's mobile and digital offerings.
"A more flexible formula that seeks to determine accessibility and real impact considering the variety of channels customers now use, instead of simply counting the number of branches, would both promote CRA's goal of serving LMI individuals and recognize the new digital reality of banking," Nikki Holsopple, JPMorgan’s community reinvestment executive, wrote in a comment letter.
At the same time, Holsopple wrote that JPMorgan recognized the importance of branches and reiterated a commitment to physical location. The American Bankers Association struck a similar tone in its letter, calling for regulators to reduce the weighting of physical branches in the exam while recognizing branches should continue to play a role in the CRA evaluation.
It is too early to tell how the CRA will unfold. Top regulators at the various agencies in charge of implementing the law have voiced varying opinions on the reform effort.
Bryan Hubbard, a spokesman for the OCC, wrote in an email that the regulator hopes to modernize the CRA. As part of the OCC's advance notice of proposed rulemaking, the regulator requests comment on potentially broadening and clarifying definitions of which loans qualify for credit in the CRA exam.
"The OCC's intent is to strengthen CRA so that it provides transparent incentives to promote investment and banking services where they are needed most and provide a means to clearly and objectively measure banks' progress in doing so," Hubbard wrote.
Federal Reserve Gov. Lael Brainard has said regulators should look to preserve what works in the CRA and look to improve it, saying regulators need to retain an assessment of banks' branch networks.
"While technology has much to offer by way of convenience and customer experience, it is often a complement to, rather than a replacement for, bank branches," Brainard said March 12.
Federal Deposit Insurance Corp. Chair Jelena McWilliams said it is too early to determine how regulators will pursue CRA reform, describing the current state as "throw everything out there and see what sticks." On May 27, McWilliams said regulators were close to drafting a document and that she expected a proposed rule would be issued "within a couple months after that."
She said it could make sense to reconsider the weighting of branches for digitally focused banks. While digital banks look to serve the national market, the CRA exam evaluates their efforts only in areas around a branch. Some digital banks operate a single branch in a remote location.
"How do we account for branches in a world that's turning branchless?" McWilliams said in an interview. "You have banks with a large digital footprint and [a] small number of branches, and so the new CRA, however it comes out, needs to accommodate for that. But I wouldn't say it's de-emphasizing the importance of branches. I would say it's recalibrating based on the current regime where we have banks without branches."
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