November 2023 OBA Legal Briefs

  • Loans, ECOA, and Noncitizen Discrimination
  • New CRA Final Rule Released

Loans, ECOA, and Noncitizen Discrimination

By Andy Zavoina

To me, this is one of those statements that says it is a warning shot and you need to know where the bullet may drop. This is your opportunity to evaluate the situation and step to the side to avoid injury, if necessary. On October 18, 2023, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) published a joint statement in the Federal Register (, “to assist creditors and borrowers in understanding the potential civil rights implications of a creditor’s consideration of an individual’s immigration status under the Equal Credit Opportunity Act (ECOA)”. The DOJ enforces civil rights violations as well as fair lending, so its involvement identifies the purpose of the statement.

First, let’s review what the joint statement says. It clearly states that lenders need to understand, “the potential civil rights implications of a creditor’s consideration of an individual’s immigration status under ECOA. ECOA does not expressly prohibit consideration of immigration status…,” and then it gets to the intent of the statement, “creditors should be aware that unnecessary or overbroad reliance on immigration status in the credit decisioning process, including when that reliance is based on bias, may run afoul of ECOA’s antidiscrimination provisions and could also violate other laws.”

I have taught Reg B, which implements ECOA, for many years. In subsection 1002.5(e) it states, “A creditor may inquire about the permanent residency and immigration status of an applicant or any other person in connection with a credit transaction.” That is under the section titled, “Rules concerning requests for information.” When I teach, I mention this section as being a nondiscriminatory way to ascertain residency status as it pertains to future collection of a debt. This should have nothing to do with color, race, religion or any other protected basis that cannot be used in making a loan decision. The intent of the question is, would this person be subject to, or scheduled to move out of the country during the term of the loan, and where might your collateral be at that time? When a person has few ties to where they live, it is easier for them to move and harder for you to contact them when necessary. I can tell you from experience that repossessing collateral internationally is much harder, and you are at the mercy of others when it comes to the bill and a sale.

As an example, person A arrived in your area a few months ago from South America. She is an executive at a large company that is a particularly good customer of the bank. She wants to buy a new car and finance it for sixty months. If your applicant has a B-1 visa and applies for this loan, be aware that the typical stay is usually six months for work, with a possible extension for another six months. What will happen to this new car in just a few months? What if the extension being requested is not approved? These are valid concerns.

On the other hand, if the lender reviews an application from the same person but for a short term loan that will be repaid prior to the visa’s expiration, and interviews the person, but still does not like the fact that English is a second language, communication is difficult at best, and the applicant is not a U.S. citizen, and denies the request for those reasons, that could be the Reg B issue this joint statement is concerned with. This is an obviously made-up scenario, but the point is, you may consider the immigration status but be cautious if it is a key reason for the denial. Lenders are still concerned with credit risk based on capacity, character, capital, collateral and conditions. Quoting from the joint statement, “Creditors should therefore be aware that if their consideration of immigration status is not ‘necessary to ascertain the creditor’s rights and remedies regarding repayment,’ and it results in discrimination on a prohibited basis, it violates ECOA and Regulation B.” At the end of the day, does the lender predict the loan would perform and pay as agreed or not? Is it a collateral rights or access issue? These are questions for the bank. A lender’s bias should not influence the credit decision of the bank as it is the bank making the loan. That is the heart of the joint statement as I read it.

Reg B tells us “…a creditor may consider any information obtained, so long as the information is not used to discriminate against an applicant on a prohibited basis.” If immigration status is a proxy for race, religion, national origin, color, or any prohibited basis, that would be a violation. As the joint statement explains it, “Regulation B notably provides that a ‘creditor may consider [an] applicant’s immigration status or status as a permanent resident of the United States, and any additional information that may be necessary to ascertain the creditor’s rights and remedies regarding repayment.’ 12 C.F.R. § 1002.6(b)(7). Regulation B does not, however, provide a safe harbor for all consideration of immigration status.” And this is where I would like to remind readers that, as noted above, it is the bank taking action here through a lender, and it is the bank’s responsibility to ensure compliance.
Considering the above, we may also introduce Bank Secrecy Act prohibitions here. Like the issues above, this may be a training issue that lenders should be reminded of. In section II of the joint statement we find, “As a general matter, creditors should evaluate whether their reliance on immigration status, citizenship status, or “alienage” (i.e., an individual’s status as a non-citizen) is necessary or unnecessary to ascertain their rights or remedies regarding repayment. To the extent that a creditor is relying on immigration status for a reason other than determining its rights or remedies for repayment, and the creditor cannot show that such reliance is necessary to meet other binding legal obligations, such as restrictions on dealings with citizens of particular countries, 12 C.F.R. pt. 1002, Supp I. ¶ 2(z)-2, the creditor may risk engaging in unlawful discrimination, including on the basis of race or national origin, in violation of ECOA and Regulation B.” What does comment 2(z)-2 address? It addresses National Origin. “A creditor may not refuse to grant credit because an applicant comes from a particular country but may take the applicant’s immigration status into account. A creditor may also take into account any applicable law, regulation, or executive order restricting dealings with citizens (or the government) of a particular country or imposing limitations regarding credit extended for their use.”

Going forward, banks should consider training in-person or at the least by memorandum or computer-based training reminding lenders of these issues. No bank or lender should look to automatically decline loan applications from certain groups of noncitizens regardless of the credit qualifications because of the citizenship unless there is a legal prohibition preventing working with them. To carry this to the next level of fair banking, the same rules should apply to deposit and service relationships. Denying a loan, deposit or service to someone solely because they do not have a Social Security account number is too broad a reach based on that one criterion. The absence of an SSAN should not be a proxy for non-citizenship which ignores other credit qualifications and causes an automatic denial. Treating this group of applicants differently would also be a Reg B violation. For example, that could include requiring all non-SSAN applicants to apply in person. When such a requirement is applied to a group and is predicated on a prohibited basis, it would be a discriminatory act.

It was recently noted that rules are changing to allow more people to be paired testers who enter a bank and apply for loans. The paired testers involve one applicant who has characteristics of a prohibited basis and another who does not, but the underlying credit qualifications for both are similar. An example would be a white couple applying for a joint loan and a Black couple asking for the same product and terms. The object is to detect if they are treated differently. I recall one evaluation from paired testers which criticized the lender because the majority testers were offered soft drinks, and the minority testers were not. The evaluations drill way down of what is considered being “treated similarly.” In addition to this training, the bank should ensure there are no conflicts in any policies and procedures. It should be an accepted fact that examiners will be scrutinizing this issue in your next compliance or fair lending exam. All banks would be wise to review the issues in advance of that.

I must be clear that I am not a lawyer, and this is not legal guidance. The joint statement gets its points across, but it offers advice that you can consider immigration status but cannot consider it completely or in a broad, overreaching manner. There is subjectivity in the terms used, but with what I read between the lines, the objective is as I stated above, make loans to those qualified, do not exclude a qualified borrower because they are a non-citizen, and lend in a safe and sound manner to comply with ECOA and civil rights.

Other Fair Lending Concerns

If your bank considers implementing a review and training on this fair lending and civil rights issue, you might as well get the most bang for your training buck and consider adding some “lessons learned” from mid-year CFPB release of its “2022 Fair Lending Annual Report to Congress” found here, .
It shows how the CFPB set its sights on redlining and appraisal discrimination in the prior year, and we can rest assured it did not end there. Since that report was filed, an Oklahoma bank settled a redlining case for $1.15 million for failing to provide mortgages in all areas for a four-year period from 2017 through 2021. That case originated as a referral from the FDIC to the DOJ, which has the authority to handle fair lending cases. The bank allegedly engaged in a pattern or practice of lending discrimination by redlining historically Black neighborhoods in the Tulsa MSA. In part, the proposed consent order calls for the bank to:

1) Invest at least $950,000 in a loan subsidy fund to increase credit for home mortgage loans and lines of credit for consumers applying in majority-Black and Hispanic census tracts in the Tulsa MSA;
2) Spend at least $100,000 in advertising, community outreach, and consumer financial education programs and credit counseling in the Tulsa MSA;
3) Spend at least $100,000 in developing partnerships with one or more community-based or governmental organizations that provide the residents of majority-Black and Hispanic census tracts in the Tulsa MSA with services related to credit, financial education, homeownership, and foreclosure prevention;
4) Establish a community-oriented loan production office in a majority-Black and Hispanic census tract in the Tulsa MSA;
5) Assign at least two full-time loan officers to solicit mortgage applications primarily in majority-Black and Hispanic census tracts in the Tulsa MSA;
6) Employ a full-time director of community lending to oversee the continued development of lending.

Another recent redlining case occurring after the 2022 report involves a $9 million settlement agreement with a Rhode Island bank that allegedly failed to provide mortgage lending services in majority-Black and Hispanic neighborhoods in Rhode Island between 2016 and 2022. This case had its settlement agreement released at the end of September 2023. In this case the DOJ announced the bank would, among other things:

1) Invest at least $7 million in a loan subsidy fund for majority-Black and Hispanic neighborhoods in Rhode Island to increase access to credit for home mortgage, improvement, and refinance loans, and home equity loans and lines of credit;
2) Invest $1 million towards outreach, advertising, consumer financial education, and credit counseling initiatives;
3) Invest $1 million in developing community partnerships to expand access to residential mortgage credit for Black and Hispanic consumers;
4) Establish two new branches, ensure at least two mortgage loan officers, and employ a “Director of Community Lending” in majority-Black and Hispanic neighborhoods in Rhode Island;
5) Conduct a community credit needs assessment; and
6) Produce a fair lending status report and compliance plan and conduct fair lending training.

Back to the 2022 Fair Lending Annual Report— For those interested in getting up to date on enforcement actions, it recaps 2022’s enforcement actions related to fair lending, including an action against Trident Mortgage Company for alleged unlawful discrimination on the basis of race, color or national origin.
The CFPB also referred five fair lending cases to the DOJ which included four related to redlining and one related to discriminatory underwriting.
I have written previously here on appraisal discrimination and reconsideration of value complaints so I will not go over that again. While there are still hearings being held, the most recent on November 1, 2023, you can find more in our June and July 2023 Legal Briefs.

New CRA Final Rule Released

By Andy Zavoina

The modernized Community Reinvestment Act (CRA) final rule was released on October 24, 2023. It is a joint release by the FDIC, OCC and FRB. You’ll find it here if you haven’t already downloaded a copy to work from: . It is nearly 1,500 pages, so plan to break it into chunks. This is marked as a draft, but it’s the final form we have to start with.

Here are some quick facts for an overview:

Under the final rule, banks are classified as either a:
1) large bank – those with assets of at least $2 billion as of December 31 in both of the prior two calendar years
2) intermediate bank – those with assets of at least $600 million as of December 31 in both of the prior two calendar years and less than $2 billion as of December 31 in either of the prior two calendar years
3) small bank – those with assets of less than $600 million as of December 31 in either of the prior two calendar years
4) limited purpose bank – a bank that is not in the business of extending certain loans, except on an incidental and accommodation basis, and for which a designation as a limited purpose bank is in effect.

These asset-size thresholds will be adjusted annually for inflation.

In general, the rule is effective April 1, 2024. But to understand the complexity of what is effective when, you must dissect a copy of the rule as certain amendments are effective based on conditions such as the legal cases surrounding the Small Business Loan Reporting requirements. The agencies will publish an announcement of an effective date for those delayed amendments. One group of selected sections of the common rule text adopted by the agencies will be applicable on January 1, 2026; while another group of sections implementing reporting requirements will be applicable January 1, 2027, with data reporting each April 1, beginning in 2027.

The CRA was implemented originally to help low- and moderate-income borrowers receive loans. The old saying that banks would only loan money to those who didn’t need it was not completely inaccurate. The spirit and intent of the law was to ensure that banks were making loans to customers in their market area from which deposits were being received. So, the bank would loan to its community that was supporting it with deposits to lend.

The 1977 law was not meant to work in today’s economy, as much has changed and the CRA needed to be updated. This was a huge project that needed coordination and adoption by each of the regulatory agencies. Banks needed a unified CRA so that they are similarly graded, and the same rules apply across the board. That is the attempt with the modernization of the CRA. While there is unification, each agency will still publish its own set of rules as each has its own section of the laws. Banks regulated by the:

– Office of the Comptroller of the Currency will follow 12 CFR 25 (national banks) and 12 CFR 195 (federal savings associations)
– Board of Governors of the Federal Reserve System will follow 12 CFR 228
– Federal Deposit Insurance Corporation will follow 12 CFR 345.

The massive re-write to modernize the CRA will require extensive preparation on the part of each bank. You will need to prepare for these finalized requirements as they will go into effect in stages beginning on April 1, 2024, and continuing on January 1, 2026, and January 1, 2027. One or more persons in the bank will have to digest the CRA and “chunk it out” as different deliverables will have to be decided on for each bank and the complexity of those deliverables will depend on your bank’s market, niche, strategic goals going forward, and capabilities, all compounded by the court’s actions on the 1071 rule. It is important to note that the legal cases may involve 1071 and payday lending, but they challenge more the constitutionality of the CFPB, and its method of funding designed by Congress. The Senate has had bills submitted as to 1071 revisions but there may be no consensus in the House to facilitate change. At the center legal actions are going against the cause, the CFPB, not necessarily the rules themselves. The 1071 rule for small business data gathering was brought about by the Dodd-Frank Act, another law. The CFPB was slow to enact these requirements and was taken to court in California because of it. That law is not really in question at this time so there is little reason to believe that if the CFPB were to be criticized, that the work it has done would be reversed. It is quite possible that, like the challenges which were decided by the Supreme Court on the ability to appoint a new director at the CFPB as decided on by the current President, the court agreed and said just that would be changed, now go back to work. SCOTUS could rule that funding needs to be done by Congress annually, and now go back to work. In that case the CFPB could say everything stands as planned. Some extensions might be allowed based on the delay due to the wheels of justice moving slowly, but banks may not even get an extension equal to that gap. I encourage banks to prepare now for 1071 and not to expect the rule to change. That creates a domino effect with the Reg B 1071 rule and the new CRA rule. Start looking at the CRA as though the 1071 rule will be implemented as planned, however those rules affect your bank.

Here are five key issues in the new CRA.

1) Asset thresholds for small, intermediate and large banks will change and increase.
2) Most of the rule’s requirements will go into effect on January 1, 2026, to give you time for implementation and change management procedures.
3) Data reporting requirements will begin as of January 1, 2027, and will only apply to large banks.
4) The rule allows small banks to be evaluated under the existing criteria or opt in to be evaluated under the new criteria.
5) The final rule does not include a start date for examinations pursuant to the new performance tests so that is a wait-and-see issue.

I’ve mentioned the new thresholds above in the initial recap, but here they are with some additional explanation. These go into effect January 1, 2026.

Small banks will be those with total assets of less than $600 million. This is an increase from $376 million under the current CRA. The regulatory agencies estimate that this increase will shift approximately 778 banks from intermediate to small status.

Intermediate banks will be those with total assets of at least $600 million, but less than $2 billion. This is an increase from a range of $376 million to $1.503 billion under the current CRA. It is estimated that this increase will shift approximately 216 banks from large to intermediate status.

Large banks will be those with total assets of $2 billion or more. This is an increase from $1.503 billion under the current rule. There will be additional requirements for large banks with total assets of $10 billion or more. Those items are not carved out into a separate “very large” bank category, however.

Like the current CRA, the minimum asset threshold for an intermediate or large bank must be met for two consecutive calendar year-ends to reach the intermediate or large status. The threshold amounts will be adjusted annually for inflation. The new CRA includes a definition for limited purpose banks that includes those banks that are considered a limited purpose or wholesale bank under the current regulation, but it does not use those terms.

There is a definition of “military bank” which now means a bank whose business predominantly consists of serving the needs of military personnel who serve or have served in the U.S. armed forces or their dependents. There is an exception for assessment areas carved out for these military banks. Because the customer base is literally all over the world these banks may delineate its entire deposit customer base as its assessment area.

Excluding the military banking exception, the new CRA includes two types of assessment areas — facility-based assessment areas and retail lending assessment areas.

Facility-based assessment areas will be similar to current assessment areas except for the requirement that they include entire counties. An exception to the entire-county requirement exists for small and intermediate banks so long as the assessment area consists of contiguous whole census tracts. This section of the regulation is effective April 1, 2024, but the new definition of small and intermediate banks does not become effective until January 1, 2026. This may cause confusion, but a conservative compliance approach would be for banks that meet the current definition of a small or intermediate bank to have a facility-based assessment area that does not consist of entire counties. Otherwise keep them whole for now and assess if there is good reason to divide them.

Retail lending assessment areas will be applicable to large banks, and these are not effective until January 1, 2026. Retail lending assessment areas must be established when less than 80% of retail lending occurs within facility-based assessment areas. Retail lending assessment areas will then need to be designated in any nonmetropolitan area of a state or MSA where at least 150 closed-end home mortgage loans or 400 small business loans were originated or purchased during each of the prior two calendar years.

Small banks will have the easiest road to implementation. Small banks can opt-in to the new Retail Lending Test or continue to be evaluated under the current Small Bank Lending Test.

As to evaluations, the Retail Lending Test will be optional for small banks. Intermediate and large banks may be evaluated with this test when it becomes effective January 1, 2026. The agencies have not yet indicated when evaluations under the new CRA will begin. I’m sure it has not been a priority given the time gap and that they, too, need to grasp all the nuances of the new rule.

Under the current rule, which products will be evaluated may depend on borrower profiles and geographic distribution of loans. Now there will be Retail Lending Volume Screens and Major Product Line Standards which will provide the metrics. The loan types, such as home mortgages, multifamily, small business, small farm, and automobile loans, which will be evaluated can vary by assessment area and by Outside Retail Lending Areas. These are areas nationwide where the bank originated or purchased loans in a product line that is being evaluated outside any of its facility-based or retail lending assessment areas. Modernization, remember. This is not foreign to military banks as their effective lending areas exceeded local geographies. The bank’s lending performance will be evaluated in outside retail lending areas for large banks and in certain circumstances for intermediate and small banks.

Intermediate and small banks will be evaluated when more than 50% of certain loans have been originated or purchased outside of their assessment areas during the prior two calendar years or, if desired at your bank’s option.

As is the case under the current CRA, intermediate banks will be subject to two tests, and each contributes one-half to the total rating. The Retail Lending Test replaces the current lending test. Banks will have the option to be evaluated under the current Community Development test for intermediate banks for community development loans and services, along with qualified investments or a new Community Development Financing Test.

This new test evaluates your bank’s dollar volumes for community development loans and investments. This is compared to your deposit base and uses a new Impact and Responsiveness Review.

Community development activities have long been an area of subjectivity and there are changes effective January 1, 2026, to these.

You will now have eleven qualification criteria to determine if a loan, investment or service is a valid community development activity. You may also be eligible to receive full or partial credit. You will consider affordable housing, revitalization, and stabilization as well as economic development. There will also be considerations for community support services and new possibilities such as essential community facilities and infrastructure, disaster preparedness and weather resiliency as examples.

The Impact and Responsiveness of community development activities will be evaluated using a list of about twelve factors including:

– the benefit to counties with persistent poverty or census tracts with a poverty rate of 40 percent or more;
– support for minority depository institutions, women’s depository institutions, low-income credit unions or certified community development financial institutions;
– support of businesses or farms with gross annual revenues of $250,000 or less;
– whether it benefits or serves residents of Native Land Areas or benefits projects financed with low-income housing tax credit or new markets tax credit.

You will now be able to receive credit for community development activities anywhere in the country.

Large banks will now be evaluated under four tests. The Retail Lending Test and the Community Development Financing Test will each contribute 40%. The Retail Services and Products Test and the Community Development Services Test will each contribute 10%.

The Retail Services and Products Test will evaluate the bank’s credit and deposit products and programs along with the responsiveness of these programs to the needs of LMI communities. It will also assess your delivery methods, including digital, as well as the availability of branch and remote service facilities.

Deposit products will be evaluated based on availability and usage and only receive positive consideration for those larger banks with more than $10 billion in total assets or at the bank’s option for those with assets of $10 billion or less.