New York State is close to approving a controversial bill that expands the requirements of the state community reinvestment act (CRA) to non-depository lenders, following the lead of Massachusetts and Illinois.
The CRA rule, enacted in 1977, mandates that banks help meet the credit needs of communities in which they take deposits, specifically in low- and moderate-income neighborhoods. Some states, however, are adopting the same rule for non-depository lenders.
The New York State Senate delivered Bill A.06247-A/S.5246-A on Friday to Gov. Kathy Hochul, who has ten days to approve or reject. According to a source, the expectation from the mortgage industry is that the governor will sign the bill – if so, it will become law 90 days later.
New York legislators cite redlining as the primary reason to include non-depository lenders in the CRA rule. According to the bill, sponsored by State Senator Tim Kennedy (D), redlining was exacerbated by the COVID-19 pandemic.
“Omitting non-depository lenders, who currently hold a substantial portion of the mortgage lending market, from CRA monitoring leaves communities vulnerable to fair lending abuses in the New York State residential loan market,” the bill states.
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To support the bill, sponsors mention a February report from the New York Department of Financial Services, which found that non-CRA-regulated banks offered higher rates to minorities and low-income borrowers in the Buffalo region.
“Several of the nonbank mortgage lenders DFS investigated made little to no effort to do business in majority-minority neighborhoods, do not have adequate fair lending compliance programs, and do not track whether or how well they are serving populations of color,” the state DFS said.
(The agency also announced a settlement with nonbank lender Hunt Mortgage Corporation, which it said lacked fair lending and compliance programs but did not intentionally discriminate against minorities.)
The bill has received strong opposition from much of the mortgage industry, which these days is dominated by nonbanks. The main criticism is that, as non-depository lenders cannot accept deposits, by definition they do not fail to “reinvest” in communities.
“Instead, the independent mortgage banks business model takes funds gathered from global capital markets and reinvests them in local New York communities, with a focus on LMI and minority households,” industry trade group Mortgage Bankers Association (MBA) said in a statement. The trade group in July asked former Gov. Andrew Cuomo to veto the bill. It later made similar overtures to Hochul, Cuomo’s successor.
Opponents of the bill also contend that the Fair Housing Act and Equal Credit Opportunity Act (ECOA) applies to all mortgage lenders, including nonbanks, and contain strict penalties for discrimination.
According to the Community Home Lenders Association (CHLA), another trade group, nonbanks – particularly smaller ones – follow underwriting standards of federal agency loans and state bond programs, both of which focus on underserved borrowers.
“Applying a bank-based regulatory scheme on IMBs that don’t have either access to federal funds or a community-based deposit base will just impose an unnecessary new regulatory burden on IMBs while doing nothing to improve consumer access to mortgage credit,” said the executive director of the CHLA, Scott Olson, in an opinion article published on HousingWire in May.
The MBA’s letter to Cuomo mentioned that In New York in 2020, IMBs accounted for 85% of all loans insured by the Federal Housing Administration (FHA), 72% of loans guaranteed by the Department of Veterans Affairs (VA), and 78% of loans insured by the Rural Housing Service. IMBs in New York originated 51% of home purchase mortgage loans to minority homebuyers in 2020, the trade group said.
Supporters of the law cite Massachusetts as a model for reform. The state conducted the first nonbank CRA exam in 2009. According to data provided by MBA, nonbanks’ share of mortgages to minorities increased from 27% in 2008 to 62% in 2020 in Massachusetts (129% increase). In New York, it rose from 19% to 51% over the same period (157% increase).
Illinois passed a law in March expanding the CRA law to nonbank lenders but it is still working on the rules.