On Monday, New York Governor Kathy Hochul signed legislation to expand the state’s community reinvestment law to cover nonbank mortgage lenders who are licensed in the state of New York. Effective November 2022, the New York Department of Financial Services (“DFS”) will begin considering nonbank lenders’ performance in meeting community credit needs. The new law requires the DFS to consider the lenders’ performance when DFS takes any action on an application for a change in control. DFS also may promulgate regulations to require a community reinvestment assessment in other situations, such as upon other applications or notices made to the DFS.
Similar to its federal counterpart, the Community Reinvestment Act, the New York law will require DFS to make a written record of a mortgage lender’s performance in helping to meet the credit needs of its entire community, including low and moderate income (“LMI”) neighborhoods, and consistent with safe and sound operation. This written assessment may be made available to the public upon request. “Community” is not defined, but I would expect this to be interpreted to mean the entire state of New York, with a particular focus on performance in LMI census tracts.
In assessing a mortgage lender’s record of performance, the DFS must consider certain factors, including:
(a) What the lender did to ascertain the credit needs of its community, including the extent of its efforts to communicate with community members;
(b) The extent of its marketing to the community;
(c) The extent of its participation in community outreach, community development or redevelopment, and educational programs;
(d) The extent of participation by the lender’s board or senior management in formulating its policies and reviewing its performance with respect to community credit needs;
(e) Any practices intended to discourage application for types of credit offered;
(f) The geographic distribution of the lender’s loan applications, originations, and denials;
(g) Evidence of prohibited discriminatory or other illegal credit practices;
(h) The lender’s record of opening and closing offices and providing services at offices;
(i) The lender’s participation in governmentally insured, guaranteed or subsidized loan programs for housing;
(j) The lender’s ability to meet various community credit needs based on its financial condition, size, legal impediments, local economic condition and other factors; and
(k) Other factors that, in the judgment of the superintendent, reasonably bear upon the extent to which a lender is helping to meet the credit needs of its entire community.
Licensed mortgage lenders have some time to prepare for these DFS reviews, as the law does not become effective for another year. Licensed lenders should expect performance assessments to cover all aspect of their mortgage origination activities in New York, and should remain abreast of any regulations the DFS promulgates to interpret the law. Among other things, it may decide to limit the law’s application to licensees that originate a minimum number of loans annually, and may provide a numerical grading scale.
With the passage of this law, New York becomes the third state to include nonbank mortgage lenders in its community reinvestment assessments. In March of this year, Illinois Governor J.B. Pritzker signed into law the Illinois Community Reinvestment Act (“ILCRA”). The ILCRA applies not only to Illinois state-chartered banks and credit unions, but also to non-bank mortgage lenders licensed under the Illinois Residential Mortgage License Act that lend or originate 50 or more residential mortgage loans per year. The Illinois Department of Financial and Professional Regulation is engaging in rulemaking to develop the contours for performance assessments under the ILCRA.
The only other state that currently applies its community reinvestment laws to non-bank mortgage lenders is Massachusetts. Nonbank mortgage lenders who are unfamiliar with CRA examinations may wish to review Massachusetts’ CRA compliance website, because the Massachusetts law has been in effect for a number of years. The Division of Banks examines licensed mortgage lenders making 50 or more home mortgage loans in the previous two calendar years, and publishes their ratings (outstanding, high satisfactory, satisfactory, needs to improve or substantial noncompliance) and performance evaluations online.
We expect community credit needs to remain a focus of state legislation, with more states likely to adopt or expand their community reinvestment laws to cover nonbank mortgage lenders. Meanwhile, at the federal level, the three federal banking regulators that oversee the Community Reinvestment Act—the OCC, Fed, and FDIC—continue to work on modernizing their regulations, which apply only to banks and credit unions. While the Community Reinvestment Act only applies to insured depository institutions, politicians, consumer groups and federal regulators (including Federal Reserve Chairman Powell) have publicly supported an expansion to nonbanks on prior occasions. These legislative and regulatory developments are in line with recent state and federal enforcement actions for alleged redlining, which have expanded to include nonbank lenders. Nonbank mortgage lenders thus should expect the geographic distribution of their lending services to be a focal point of future examination.