Podcast S5E3 | CRA and Fair Lending: Mary Bailey

TRANSCRIPT

Kimberley Cole 0:01
This is Risky Women Radio – a show to connect, celebrate and champion women in risk, regulation, and compliance. Sharing insight and perspectives from the most influential members of our global Risky women network on the latest developments, we need to think about, the challenges we should all talk more about and the innovation we are most excited about governance, risk, and compliance. Bringing together the hundreds of senior women professionals already connected with a new emerging group of leading women and men. I’m Kimberley Cole, your chief risky woman.

Shelley Metz-Galloway 0:39
Welcome back to our podcast Series on Risky Women Radio, where we will be talking about change innovation and looking ahead at the views of some amazing risky women on what’s next in the world of risk and compliance. I’m Shelly Metz-Galloway, US lead of Protiviti’s regulatory compliance practice. And I have the pleasure of introducing you to today’s risky woman, and Protiviti alum Mary Bailey. Mary is a regulatory compliance specialist, CRA expert and principal of Mint Consulting. Mary has more than 35 years experience in regulatory compliance and CRA as a consultant, Chief Compliance Officer of two midsize banks, and now principal of Mint Consulting. Welcome, Mary.

Mary Bailey 1:30
Thank you.

Shelley Metz-Galloway 1:31
Mary. Before we get started, please tell us a little bit more about yourself.

Mary Bailey 1:37
I’ve been in banking for 35 plus years with the first portion of that being in smaller banks where I wore multiple hats as either a loan Operations Manager, consumer lender or mortgage lender for a division I started plus serving as compliance officer and CRA officer. For the past 20 years, I’ve been focused primarily on compliance with fair lending and CRA a major part of that.

Mary Bailey 2:02
That’s great, Mary. So tell us what excites you most about the year ahead.

Mary Bailey 2:08
I’m really looking forward to seeing the new CRA rules finalized and assisting banks with an understanding of what these mean to them from a compliance and operational perspective. In other words, figuring out how to get the information they need, map it to the systems they will use to report it, and perform CRA self assessments to determine the impact the new rules may have and whether a strategic plan should be considered. I also think it will be interesting to work with banks to help them understand the interconnection of Fair Lending and CRA and how it has evolved since CRA was enacted.

Shelley Metz-Galloway 2:45
Mary, we always talk about risks when we’re talking on Risky Women Radio. And one of the things we always like to ask our guest speakers is what is the biggest risk you’ve taken in your career?

Mary Bailey 3:01
There’s really been a couple that are related to CRA. When the CRA regulations were changed in 1995, I was working with a small bank that had a very low loan to deposit ratio. So I advised my bank where I served as CRA officer that we should consider a strategic plan. I obtained management support and was able to successfully submit the first strategic plan that was approved by the FDIC. The second one was several years later as the director of compliance and CRA officer for a mid sized commercial bank, I recommended to management that we stand up a community development corporation to assist the bank in meeting its CRA obligations. This entailed setting up a new subsidiary for the bank, a new board for this community development corporation which I chaired, engaging the time of executive leadership and changes to accounting and loan services so a significant investment for the bank. We gathered management personnel and lenders from all of our geographic areas and introduced them through a bus tour and visits with community nonprofit partners in schools to our first focus area in Dallas to gain their support and buy in. We trained lenders and underwriters on the qualifications of community development loans, and quite honestly rewarded them from a bonus perspective with identifying and booking CB loans through the CDC. The bank invested, as I said a substantial amount of capital into the CDC. And each year we rolled out the same type of program in our other markets, which was a source of great pride for the regional presidents and bank employees to offer in their communities. But most importantly, the CDC injected millions of dollars in funding to our low and moderate income areas and populations within the communities we served.

Shelley Metz-Galloway 4:58
So that is very exciting Mary. Thank you for sharing that with us risk often entails innovation. And in both cases, you were very innovative in submitting the first strategic plan that was approved by the FDIC and setting up the CDC to move your financial institution into a better position relative to serving low and moderate income communities and individuals.

Kimberley Cole 5:24
This episode is brought to you by Protiviti. Protiviti is a global consulting firm with deep expertise in transformation, risk management and compliance. Partner with Protiviti and face the future with confidence.

Shelley Metz-Galloway 5:45
So, with that, we’re very excited to hear more about how compliance is changing in these areas. We know that here in the United States as well as internationally, there has been an effort to increase access to and utilization of financial services by previously marginalized groups. We begin with the 1977 Community Reinvestment Act, which was then and continues now to be a part of a legislative effort to end redlining and discrimination in consumer lending. The Community Reinvestment Act was really a response to a failure of financial institutions to lend to minority and low and moderate income communities. The effort originally began in 1968 with the Fair Housing Act, which directly prohibited discrimination in housing. It was followed by the Equal Credit Opportunity Act in 1974. It was then supported in 1975, by the Home Mortgage Disclosure Act, which required the reporting of lending activity by covered institutions. And then finally, it was extended by the Community Reinvestment Act of 1977, which instituted an affirmative obligation to take action to lend to LMI communities. So then we know in 1989, financial institutions were required to publicly disclose their ratings and exam results, which was further strengthened in 1995 by the publishing of CRA exam procedures. The focus of these regulations has been in creating an obligation to meet the needs of the entire community. In fact, since going into effect, the CRA has resulted in more than $883 billion of investment in housing loans, and $973 billion in small business loans. So Mary, based on those details, we have a history in the United States of implementing laws and regulations that are focused on eliminating discriminatory practices in lending to communities of color and those in low and moderate income segments. From your perspective, what efforts have been made internationally that are focused on the same goals.

Mary Bailey 8:21
In the early 2000s, there was a global fair lending initiative that appeared to have gained support from over 75 countries throughout the world. They were focused on driving support for the development and implementation of laws and regulations to increase access to credit to historically underserved communities by ensuring the elimination of discriminatory lending practices through regulatory action. The initiative reported 15 conferences with attendees from 80 countries as well as the development of a compendium of financial laws and several briefing papers. However, it’s unclear what has become of that initiative as I’ve been unable to find if there was a continuance to this effort, with it looking like the breakdown may have been after 2008. It does appear, however, that there was a more recent movement in 2020, called The Great Reset underway through the United Nations General Assembly’s World Economic Forum that appears to offer opportunities for an approach like CRA and fair lending to advance portions of their agenda.

Shelley Metz-Galloway 9:28
What’s very interesting about that, Mary, as you were speaking, was that the breakdown having occurred after 2008 is consistent with the recession that occurred in 2008. And as we all know, there was a great number of issues in the housing market at that time. So there may have been a refocus there. In any event in each instance, both internationally and here in the United States the effort is focused on improving access to credit for previously underserved communities. The industry often thinks of the Community Reinvestment Act in terms of serving low and moderate income communities. But isn’t there also intersectionality between CRA and fair lending? What are your thoughts on the relationship between the two Mary?

Mary Bailey 10:18
CRA’s primary objective is to evaluate a bank’s obligation to help meet the credit needs of the entire communities they serve including low and moderate income neighborhoods in a safe and sound manner. This by attrition has expanded to also acknowledge that a bank needs to help meet the banking services needs of its entire community. CRA evaluations now and for several years have acknowledged that discrimination and other illegal credit practices are contrary to meeting the credit needs of a community. As a result of this acknowledgement. The results of negative fair lending examinations can affect a bank’s CRA evaluation resulting in a downgrade to the overall rating. In the most recent CRA proposal, the regulator’s put it best when they stated that one of their objectives is to confirm that CRA and fair lending responsibilities are mutually reinforcing.

Shelley Metz-Galloway 11:16
So now we’re anticipating the introduction of updated and new requirements for the Community Reinvestment Act. On July 20 2021, the OCC announced that it would propose to rescind its CRA rule published in June of 2020, because they wanted to work with the Federal Reserve Board and the FDIC to put forward a joint rulemaking that strengthened and modernized CRA. Then in December of 2021, the OCC issued a final rule that rescinded the June 2020 rule, and replaced it with a rule based largely on the agency’s 1995 rules. So this activity realigned the OCCs CRA rule with those of the Federal Reserve Board in the FDIC, the interagency proposed rule would, when finalized, replace the current CRA rules in effect for all agencies. Mary, from your perspective, what are some of the most significant changes to the rule that you have identified in your reading? And what impact do you expect this to have in the industry?

Mary Bailey 12:31
In my opinion, the significant proposed changes are many, particularly for large banks and include but aren’t limited to one changes in the criteria for assessment areas for large banks with the addition of retail lending assessment areas, which are over and above the facility based assessment areas that are currently used by banks. This is definite impact on banks that currently deem their assessment areas to only be in the counties where they have physical branches are deposit taking ATMs, but they do significant levels of mortgage lending or small business lending in other geographic areas. If a bank has originated at least 100 more home mortgage loans or 250 small business loans during the preceding two years in any MSA or non metropolitan area of a state throughout the country, but they don’t have a branch in those areas. These will now be considered retail lending assessment areas and will be included in the bank’s CRA evaluation.

Next, the ability for banks to receive CRA credit for any qualified community development activity regardless of its location is a significant change. The inclusion of consumer automobile loans is a major product line to be evaluated under the retail lending test if they meet certain criteria is another significant change. These will be evaluated for large banks whether the bank wishes them to be considered or not if there is a significant level of that type of lending. The use of the retail lending volume screen retail volume lending thresholds and the retail lending distribution metrics is a new change to CRA, something that has not been done before. That consolidation of the community development portion of the lending test and the qualified investments test into the community development financing test is a big change. Also for deposits, it’s going to be imperative for large banks to show the exact locations of their depositors. In other words, be able to geocode the home addresses a consumers and business addresses of commercial customers to understand how they are serving LMI areas. There’s also going to be clear guidance on the expectation and consideration for deposit products that are responsive to the needs of low and moderate income individuals, there is definitive designation of the types of violations that will affect the bank’s CRA writing. There is also an addition of the requirement for banks over $10 billion, and those that may wish for certain data to be considered to collect and maintain that data in a machine readable form. Banks with assets over $10 billion are going to have to report their deposit data annually. For large banks, they will have to report their community development investments in addition to their community development loans, community development services, and assessment areas, that’s going to be required to be done on an annual basis. There’s also going to be an inclusion of home mortgage loans by borrower race and ethnicity in the bank’s CRA performance evaluation which highlights the fact that there is definitely an interaction now being designated between CRA and fair lending.

And finally, a significant change for business loan reporting is that small businesses will be changed to define a small business is having gross annual revenues of $5 million or less. I believe that the impact on the industry is an updated CRA evaluation framework with tailored performance standards that are applied based on bank asset sizes such as small, intermediate and large, and business models, wholesale and limited purpose banks is an improvement. In other words, it makes for more standardized evaluations.

Also, while these changes are still in the proposal and comment period, I believe that all banks should at least familiarize themselves with the changes and start thinking through how they apply to their bank and how they’re going to implement them if they’re approved. There will be many systems and processes that either need to be created or revised, and some data cleanup that will need to be performed in order to comply with many of the new requirements. I believe that once the proposal’s finalized, each bank should work as quickly as possible to implement a detailed action plan and assign accountability. In some ways, these changes should be equated to the trade implementation, and are even more complex than the changes that were implemented for data

Shelley Metz-Galloway 17:27
Well Mary, those were a lot of changes, changes in the assessment area, and what qualifies for community development activity, the need to consolidate a number of the test differences for banks over 10 billion reporting investments in deposits. So we’re seeing under the proposed rule, a great many number of changes that financial institutions are going to have to grapple with in order to be able to meet the requirements of the new reg. Well, with that, and that’s a lot. I’m going to move into a final few questions. Mary in one word, what do you see as the top priority for 2022?

Mary Bailey 18:17
Changes.

Shelley Metz-Galloway 18:18
And what advice would you give women who are pursuing careers in financial services and innovation?

Mary Bailey 18:27
Find your passion. Be honest, be strong, be professional. Don’t be afraid to recommend changes, and don’t give up.

Shelley Metz-Galloway 18:38
That’s great advice. In particular, given that for the year ahead, and in 2022, your one word is one of changes. So we have to be able to manage those changes and move forward successfully. That brings this episode of Risky Women Radio to an end. But I’m very excited to continue on our transformation series journey. Thank you so very much, Mary, for joining us today and for your thoughts and valuable insights.

Mary Bailey 19:07
You’re welcome. Thank you.

Kimberley Cole 19:09
Thank you for listening to this exciting episode of Risky Women Radio, to connect, champion and celebrate women in risk, regulation and compliance. I’m Kimberley Cole, based in Hong Kong. For more information on the Risky Women global network, head to our website, and the episode notes and please be part of the ongoing conversation by subscribing to this podcast, connecting with us @RiskyWomen on Twitter, or even reaching out to me directly by email.