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Million-Dollar Mortgages Can Give U.S. Banks Credit For Low-Income Lending

On Manhattan's famously posh 5th Avenue, a monster, 3,700-square-foot apartment with views of Central Park and an elevator that opens directly to the unit went on the market earlier this year with a $7 million price tag. If it sold, regulators would credit its lender for helping a low-income neighborhood.

The Community Reinvestment Act, a 40-year-old law meant to encourage credit extension in low-income areas, applies a quantitative test to bank activities. With the rapid gentrification of certain neighborhoods, banks can get CRA credit for million-dollar mortgages in poor areas.

"It's a hot-button question because the issue of gentrification has been resurfacing in the last five years," said Josh Silver, a researcher who has written about CRA and a senior adviser at National Community Reinvestment Coalition, a nonprofit that advocates for fair lending.

CRA tests are very important for bank operations because a failure can lead to regulatory restrictions on merger activity or even the opening of new branches. Recently, the Treasury Department suggested there might be a reconsideration of the law, and a leading bank regulator issued guidance instructing examiners to consider a bank's remedial actions when grading CRA compliance. A CRA test evaluates a variety of activities, including loans to underserved or low-income neighborhoods.

Few metropolitan areas have such rapid price increases in low-income neighborhoods as New York City. In Manhattan, there are eight census tracts designated as low-income or underserved with an average mortgage of $500,000 or higher, according to data analyzed by S&P Global Market Intelligence. The analysis was limited to tracts with at least 10 mortgages issued over 18 months.

It's a hot-button question because the issue of gentrification has been resurfacing in the last five years.
The Federal Deposit Insurance Corp. confirmed that banks receive CRA credit for all home mortgage loans in the banks' assessment areas. "However, greater emphasis is given to loans made to low- or moderate-income borrowers and in low- or moderate-income geographies," the regulator noted.

That means some banks have been able to issue high-priced mortgages to well-heeled borrowers while still receiving CRA credit. In one Spanish Harlem tract, which abuts Central Park, the average mortgage amount from 2016 through the first half of 2017 was $1.2 million, contrasted to an average income of $73,762. The CRA focuses on median income, which comes in at just $33,563, compared to a median mortgage of $461,250. The neighborhood has historically been marked by high levels of poverty, but has recently seen significant gentrification, particularly in areas next to Central Park.

Manhattan low income designated census tract trends

On homebuying site Zillow, there were seven homes listed for sale in the tract — the cheapest being a one-bedroom, 840-square-foot apartment asking $1.03 million. The tracts are in areas well-known as gentrification hubs, with four of the eight tracts in Harlem. In the 10029 ZIP code, which includes three low-income tracts with high-priced mortgages, the portion of high-income households has doubled in just over a decade. In 2000, just 2.0% of households in the ZIP code earned $200,000 or more. By 2011, the ratio was up to 3.9%, increasing to 4.6% by 2015, according to data from the U.S. Census.

That sort of disparity between the CRA designation and the mortgage amount should trigger additional scrutiny from examiners, Silver said. On the other hand, Silver said banks should get some credit for high-income loans in low-income neighborhoods because research has shown that children from low-income families benefit from attending schools with a diverse range of incomes. The question comes down to one of scale.

"If you're doing 100 loans in a low-income tract and 95 are going to middle- and upper-income people in that tract, I, as an advocate, am going to be a little dubious about the benefits," Silver said. He said it is generally up to local community activists to draw attention to that sort of discrepancy.

But a wide disparity in regular banking activity and mortgage lending can trigger additional scrutiny, said Trey Sullivan, CEO and president of TRUPOINT Partners, a CRA compliance software company. Sullivan said a key metric for CRA examiners is a bank's loan-to-deposit ratio. Typically, the ratio is meant to ensure that banks are making sufficient loans in the neighborhoods from which they are pulling deposits. But an especially high ratio, which would occur if a bank issues million-dollar mortgages in a low-income area, can also attract attention.

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"In that situation, I would venture to say the regulator who gets there is going to look at the loan-to-deposit ratio and say, 'I want to get in the car and drive by where these loans are.' And he's going to say, 'Come on, this doesn't meet the spirit of the law,'" Sullivan said.

It is very rare for banks to actually run afoul of CRA requirements. Among nearly 5,300 most-recent CRA ratings for banks, 99% are either "satisfactory" or "outstanding." Banks can fail their CRA tests by not lending sufficiently in low-income areas within their operating footprint. Most banks that fail CRA tend to be smaller, but there was a notable exception this year as regulators downgraded one of the nation's largest banks, Wells Fargo & Co. unit Wells Fargo Bank NA, in the wake of its fake-accounts scandal.

"As long as the institution shows they know the community and are providing products and services that serve the community," Sullivan said, "they usually get credit."

Largest US banks with 'needs to improve' and 'substantial noncompliance' CRA ratings

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