NY CRA Expansion to Non-Bank Mortgage Lenders

The New York State DFS is proposing a new regulation to expand the reach of the existing CRA to include nonbank mortgage lenders.

This move aims to ensure equitable lending practices and improve access to home loans for all New Yorkers, particularly those in low- and moderate-income communities.

The proposed regulation leverages the existing CRA framework for banks but considers the unique operational aspects of non-depository mortgage lending.

NY DFS Expands CRA to Nonbank Mortgage Lenders Key Points:

Addressing the Rise of Nonbank Lenders

• Nonbank mortgage lenders now originate approximately two-thirds of mortgages nationwide, significantly exceeding their 39% market share in 2008.

• The DFS recognizes this shift and seeks to hold these institutions accountable for meeting the credit needs of communities, similar to banks.

Adapting CRA to Nonbank Operations

• The regulation acknowledges that many nonbank mortgage companies lack physical branches.

• Consequently, the proposed regulation focuses on "where the lending takes place," rather than physical branch locations.

Performance Evaluation and Public Disclosure

• Nonbank mortgage bankers originating at least 200 mortgages annually in New York State will be evaluated under this regulation.

• Evaluations will assess lending practices, community development services, and adherence to fair lending laws.

• Performance will be rated as "Outstanding," "Satisfactory," "Needs to Improve," or "Substantial Noncompliance."

• Evaluation summaries and assigned ratings will be publicly disclosed.

Lending and Service Tests

Lending Test

• Focuses on the number, amount, geographic distribution, and borrower characteristics of mortgage loans within designated assessment areas. Innovative and flexible lending practices are encouraged.

Service Test

• Evaluates the availability and effectiveness of systems for delivering mortgage loan products and the extent and innovativeness of community development services, community outreach, and educational programs.

Data Collection and Reporting

• Nonbank lenders will be required to file copies of relevant reports and documents, including HMDA data, with the DFS upon request.

• Robust internal controls are mandated to ensure data accuracy and compliance with reporting requirements.

Focus on High-Cost Areas

• The DFS recognizes the challenges of affordability in high-cost areas.

• The regulation allows for flexibility in assessing mortgage lending activities related to owner-occupied housing in middle-income geographies within these areas.

Public Comment and Implementation

• The proposed regulation is subject to a 10-day pre-proposal comment period, followed by a 60-day comment period after publication in the State Register.

• The final regulation will take effect one year after issuance.

Potential Implications

• Increased scrutiny and accountability for nonbank mortgage lenders in New York.

• Potential for greater access to affordable home loans for underserved communities.

• A more level playing field between bank and nonbank lenders concerning community reinvestment obligations.

• Further development of innovative lending practices to address the needs of specific communities.

Top 5 Essential Insights for Alternative Lenders on NY CRA Expansion

1. What exactly constitutes an 'assessment area' for digital lenders?

The regulations define assessment areas for mortgage lenders without physical branches in New York State. These lenders must specify one or more lending-based assessment areas to be subject to the lending and service tests.

For lenders with at least 100 mortgage loans originated in a given Metropolitan Statistical Area (MSA) or non-metropolitan area of New York in the past two calendar years, the assessment area would be that specific MSA or non-metropolitan area, excluding any areas already included in branch-based assessment areas.

Lenders with no branches in New York State and who have not originated at least 100 mortgage loans in any specific MSA or non-metropolitan area over the preceding two years would be assessed based on the MSA or non-metropolitan area where they originated the most loans during that period.

The 200-loan threshold mentioned in the press release is for determining which nonbank mortgage lenders will be evaluated under the new regulation. This threshold applies to total originations in New York State in the preceding year, regardless of geographic concentration.

The regulations do not specify how to handle clusters of lending in certain zip codes with sporadic lending elsewhere.

2. What specific 'community development services' qualify under the service test?

Community development services are defined as services that have community development as their primary purpose and are related to the provision of financial services.

Community development encompasses a range of activities, including:

• Efforts to assist with affordable housing, including multifamily rental housing, for low- or moderate-income individuals.

• Community services targeted to low- or moderate-income individuals.

• Activities that revitalize or stabilize low- or moderate-income geographies, designated disaster areas, or distressed or underserved non-metropolitan middle-income geographies.

• Activities that seek to prevent defaults and/or foreclosures on loans used for affordable housing.

3. How to measure effectiveness and minimum "Satisfactory" requirements?

• The service test analyzes both the availability and effectiveness of a mortgage banker's systems for delivering mortgage loan products and the extent and innovativeness of its community development services, community outreach, and educational programs.

• The Department of Financial Services (DFS) evaluates community development services based on:

  • The extent to which the mortgage banker provides community development services.

  • The innovativeness and responsiveness of community development services.

  • The range of services provided and the degree to which they are tailored to meet the needs of low- and moderate-income geographies and individuals, and other underserved communities and individuals.

The DFS offers four possible ratings for lending and service performance: Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance.

While the DFS provides general descriptions of each rating, it does not specify the minimum requirements to achieve a "Satisfactory" rating for the service test.

4. How will the 'flexible lending practices' be evaluated against risk management requirements?

While there is limited insight into how "flexible lending practices" will be evaluated against risk management requirements. They highlight the tension between encouraging such practices and upholding responsible lending standards.

The regulations encourage mortgage lenders to use "innovative or flexible lending practices in a safe and sound manner" to meet the credit needs of underserved communities. However, they don't explicitly define what constitutes "innovative" or offer concrete examples.

This suggests that flexible lending practices should not compromise prudent underwriting standards or overall financial stability.

The use of alternative data in underwriting is not directly addressed. Whether it would be viewed favorably or unfavorably likely depends on how it's implemented and its impact on lending decisions and risk management.

The regulations do not detail how these new requirements will interact with existing safety and soundness regulations. This lack of clarity raises important questions about how lenders can reconcile the call for flexibility with their obligations to maintain robust risk management frameworks.

Our Opinion

Although this is mortgage lending, regulatory changes are concerning. New York often sets trends that spread to other states, so these new mortgage regulations could soon affect business lenders.

They present both threats and opportunities; for instance, mortgage lenders might shift to business lending to avoid CRA requirements, increasing competition.

The DFS suggests that high-volume lenders could face bank-like regulations, which would alter the agile business model of alternative lenders. While not impacting them directly right now, it's important to stay updated because these changes might transform alternative lending.

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