CRA Hearing Update: Consumer Banking Compliance

House Financial Services Subcommittee Hearing on CRA Modernization

The CRA is under periodic review, most recently April 9, 2019, when the House Financial Services Subcommittee on Consumer Protection and Financial Institutions held a hearing on “The Community Reinvestment Act: Assessing the Law’s Impact on Discrimination and Redlining.” The purpose of the hearing was to focus on review of the CRA effectiveness under current law and execution and whether new initiatives are necessary to modernize CRA while maintaining the core mission of the law.

Main Take-Aways from the Hearing

Output from the hearing includes the following key points:

• CRA needs reform; a fact supported by Members of the Committee as well as from witnesses. There is also a need to increase consistency among regulators as related to CRA approaches in terms of implementing an examination process which is more thorough and fair to all parties.
• Not surprisingly, Committee Democrats are concerned that CRA changes will leave low- to moderate-income (LMI) communities in need of financial support in spite of witnesses noting that changes could increase support to these groups.
• Mobile and digital banking initiatives related to the CRA need to be updated according to many Republican Committee Members.
• During the session, committee members questioned witnesses about CRA requirements related to nonbank lenders. The Chairwoman and some of the majority witnesses said it was a loophole in the law (which was written prior to fintechs) that banks were exploiting since nonbank activity ultimately had to be channeled through a regulated institution. The Subcommittee Ranking Member suggested compliance costs would rise if CRA was pushed onto non-bank lenders.

CRA Requires Technology Advances

Technology advancements take a front seat especially with the role of mobile devices available to potential prospects. The group supported the concept that the digital shift in communications has propelled consumers ahead but that CRA may not be keeping pace. Discussions also included the concept that a service test can be expanded to incorporate mobile apps and online banking. The need for face-to-face interactions to support technology was discussed as was the need to integrate mobile banking into non-served areas, especially those in rural communities. A new concept of revised metrics was raised, given the need for reinvestment due to new fintechs entering the market, especially when considering the inclusion of both rural and urban areas. Some Members agree that the CRA is adaptive and lets lenders move where there is need. It is also the opinion of some that under CRA guidelines, banks still have public service duties in economically depressed areas even if the chance of profitability declines. Banks must be made aware of technology initiatives to support mobile customer interactions that are focused on supporting digital experiences that open up more financial opportunities for consumers in low- and moderate-income (LMI) neighborhoods. Since 1977, the U.S. government has required the Federal Reserve and other federal banking regulators to motivate other financial institutions to support the credit needs of those in their communities where they operate. The Community Reinvestment Act (CRA) is backed up by examiners who review bank compliance for full community support*. Three federal agencies that monitor for CRA purposes include: Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB) and the Office of the Comptroller of the Currency (OCC). Each of these regulators has, in turn, a dedicated CRA site to provide information about the banks they monitor as well as the CRA ratings and Performance Evaluations of those financial institutions.

CRA Addresses Loan and Credit Discrimination - Especially in the Lower Income Segment

Prior to implementation of the CRA, banks and financial institutions were not required to market their services and products to those living in LMI neighborhoods. This practice was called “redlining” determined by economic and demographic statistics where lower income people resided. This was clearly a discriminatory practice and the efforts of the 1977 CRA initiative ended the illegal practice. Today, through the CRA, banks are required to review assessment demographics, economic and market trends when making qualified loan decisions. Clear cut strategic CRA goals are set and progress is monitored to maintain compliance.

Are Banks Inadvertently Being Discriminatory with Digital Processes?

On boarding, credit, and Loan applications are being processed in dramatically different ways over the past few years. Digital options are taking the place of more traditional, in-person banking, giving consumers a much wider variety of financial choices. As a result, consumers of any economic background have become empowered to shop for the best credit options, loan rates, and checking accounts available and financial institutions are offering up ways to better facilitate applications, regulations and compliance adding up to fluid customer experiences. However, by offering the ability to access Apps and websites assumes that the entire process can be completed in one fluid process. Often for LMI households, credit or loan applications must include various stipulations, which would require the person to take off from work to visit a branch ( an option, may LMI customers don’t have) or print and scan an application using tools not even more well off households have.

Simplified Onboarding and Access Points To Serve the All Segments

Outdated application processes are driving prospects away even though financial institutions are investing widely to attract many applicants in a non discriminatory way. There is a huge hole in the financial application process in spite of attractive offers. In fact, only 20-30% of applications reach completion and in some cases, more than 70% of applicants just give up the process. Amazingly, more than two thirds of abandonment situations originate from slow and sloppy processes—not pricing or even customer service. Many banks provide excellent customer experience on their websites, apps and various marketing processes. But they are failing to deliver a frictionless final stage of any application. Instead, they lose customers because of one of 3 core reasons:

• Process & Documentation Requirements
• Application Timelines and Interest
• Terms

A Push to Simplify Complex Processes

The two most wide-spread and costly challenges impacting the conversions of loan applications are unwieldy application forms and clunky collection processes of stipulations.

• Understanding and resolving these two application problems is the key to improving application yield.
• Incorrect, incomplete, unwieldy application forms gathering stipulations and compliance

Today, banks are losing their applicants in the critical last part of the application process. When banks ask applicants to complete unwieldy forms and submit documentation and stipulations, applicants get frustrated and lose interest. They feel like they are being bounced between different channels. This results in high abandonment rates. Worse, these customers abandon the application after they have already decided to become a customer of the bank. The problem is that it takes an average of five touchpoints for each borrower to finish one loan application, which translates into a very poor customer experience. This consumer experience gap only grows if an application is not compliant and has to be returned. At any one of these touchpoints, borrowers may simply decide that they don’t want to continue the application process.

Removing Impediments In Financial Transactions

Those final banking onboarding steps are precisely where Financial Institutions need to intervene. It’s precisely in those critical moments when customers determine whether to complete their process, and whether they will remain a loyal customer. Even if a customer’s entire journey to find a financial service provider has gone smoothly, it's only the ‘last mile’ that really counts. It’s in this final part of the customer experience that a CRA is drawing its attention. Currently this “last mile” is a painful experience, the customer often abandons the application process, frustrated and dissatisfied. To step-change performance and better serve LMI audiences, it’s imperative for lenders to invest in streamlining the final stages of the application process – The Last Mile.

Equip Banks with Tools to Streamline Processes

Real-time collaboration tools empower agents to provide exceptional experiences to customers even when they are on the go. Prospective clients stand to benefit from greater convenience in complementing and signing forms, providing stips and executing payments while lending agents will capitalize on the ability to immediately process loan applications. The result? Higher conversion and yield rates. Lightico enables banks, credit unions, and other financial service organizations to make it easy for their customers to complete forms, submit stips, provide signatures, and collect payments. Offer customers a smoother experience that eliminates any obstacles that could cause a customer to abandon any application.

• Electronic Signatures on Applications
• Complete Application Forms Easily
• Immediate and Secure Payment Processing
• Collect and Verify ID and Supporting Documents

*Footnote: In lieu of one of the three primary evaluation methods, the CRA regulations provide banks the option to develop a strategic plan with the input of the community. Strategic plans allow banks to tailor their performance goals to the needs of their community by working directly with the community to develop the goals. This community input into the development of the strategic plan is conducted by soliciting public comments which may be submitted for up to 30 days during the process. Strategic plans must be approved by the bank's regulator in advance and must provide measurable performance goals sufficient for a satisfactory rating. Pre-defined performance goals may be included that, if met, would merit an outstanding rating. In addition, a bank may choose to have the Federal Reserve Board evaluate its performance under another appropriate evaluation method if the bank fails to substantially meet its planned goals for a satisfactory rating. Please refer to the guidelines for requesting approval for a strategic plan (PDF). Strategic plans may cover a time period of up to five years and must be submitted to the bank’s regulator for review and approval at least three months before the proposed effective date. It will be interesting to see how CRA evolves with the advancement of digital banking options.