CRA and Subprime

The FRB's report on CRA is in. Some of the findings are interesting, particularly with respect to subprime lending.

Most of the growth in lending by non-CRA lenders to low- and moderate-income borrowers has been the result of specializing in subprime lending. Those lenders that specialize in making subprime loans generally find their best markets - or best targets - among those who have the leanest resources. In spite of this growth of non-CRA regulated lenders, the portion of loans made in LMI areas by CRA-regulated lenders has increased also.

A significant part of the growth in LMI subprime has been in refinances rather than in purchase money loans. These are the credit situations where the borrower is most vulnerable. They risk losing their home. But also significant is the fact that they already had credit. By having credit they became subprime targets.

Why are these trends significant? The CRA regulated lenders, banks and thrifts, are making loans to LMI borrowers to develop their CRA programs. However, these loans must also meet safety and soundness requirements. Thus, the banks and thrifts are making the best of the LMI loans. This leaves the less qualified borrowers to the less-regulated lenders, some of whom may be predatory lenders. The result may be that CRA lending is driving the traditional subprime lender to more forceful sales tactics simply to maintain market share.

FCRA & Employees
While we are concerned about obtaining permission from business loan applicants to pull credit reports, it is a good time to review the bank's internal practices. The bank should have permission from each employee to pull credit reports. The notice and permission for employment purposes must be on a separate piece of paper. Take some time to check the employment files to be sure that these permissions exist and are up-to-date.

Flood Compliance and CMPs
If you are having difficulties in getting lenders to comply with flood hazard insurance requirements, it could be useful to tell them about civil money penalties. The law requires the agencies to impose civil money penalties ("CMPs") whenever they find a pattern of violation. Negligence - simply not taking flood hazard requirements seriously - will lead to costly penalties for the bank.

GAO, the agency that oversees the bank regulatory agencies, has inquired as to why there are so few penalties for flood insurance violations when losses due to uninsured and flooded properties are still high. This turns into a mandate to take flood hazard insurance very seriously.

How bad can CMPs get? Examiners will review flood hazard compliance back to the last compliance examination. Each violation - each loan file - will trigger a penalty of $350. As a policy matter, you might suggest that the penalty come out of the compensation of any loan officer who shows a pattern of violations.

Audit Tip on Flood
Flood insurance compliance should be reviewed very carefully in your compliance audits. A tip from examiners indicates how thorough your audit should be. They will be asking for your statements from your flood vendor. They will compare these to the trial balance, select relevant files, and review them for compliance. They will also compare the billing statements with the actual certifications. This amounts to a detailed and thorough process. You should do it before the examiner does.

Website Violations
Does your bank have a website? If so, is it in compliance? It is well worth your time to check it. OCC recently reviewed websites of national banks and came up with some disturbing findings. Of the websites reviewed, 88% had violations of Regulation Z and 62% had violations of Regulation DD. What does your site look like?

Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 5, No. 13, 11/00