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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2018

The Compliance Balancing Act

Community reinvestment and fair-lending rules require careful navigation

The Compliance Balancing Act

Lewis Carroll famously said, “If you don’t know where you are going, any road will get you there.” This maxim certainly pertains to mortgage compliance professionals, who play a key role in helping lenders chart a clear path forward, sometimes without the benefit of clear, consistent guidance from regulators.

Tasked with coordinating strategies and goals to produce a well-balanced compliance program, compliance departments need to ensure that resources, processes and reporting are working in harmony to manage risks, keep senior management and the board of directors informed, and ensure borrowers are happy with the process. Originators, who are on the front lines of the lending process, must be aware of the issues their compliance teams face to make sure they are helping and not hindering compliance efforts.

To establish a balanced compliance program, compliance departments must be able to analyze current loan performance data and align goals of the company with the goals of regulations. Analysis results are only as good as the data being analyzed, however, so the first and most critical step is to validate the accuracy of the data being utilized.

Some data sets, such as those being reported under the Home Mortgage Disclosure Act (HMDA) and the Community Reinvestment Act (CRA), are already subject to a validation or “scrubbing” process in most financial institutions. Other data, such as auto or credit card lending, may not have been subjected to the same level of scrutiny.

At a minimum, compliance departments should take a sample of the data and use source documents to validate key fields. Much of this data is being collected by originators, so it is important for them to understand the data issues that compliance will be checking for.

Assessment areas

A solid analysis should start with an evaluation of a lender’s defined assessment area, which is a vital component for CRA compliance. Lenders should make sure to look critically at those areas just outside of the defined assessment area. Are there low- and moderate-income or majority minority areas nearby that you have excluded? Is there a solid business justification for their exclusion? This consideration can be particularly important for lenders that cover partial counties, which tends to garner additional scrutiny from examiners.

In the case of fair lending, lenders often are examined based on areas that extend beyond their designated assessment area. Determining a reasonably expected market area, or REMA, is highly subjective, but is generally the geographic area that the lender can reasonably serve based on its distribution of applications and loans, as well as its marketing and outreach efforts. Lenders should analyze applications, lending and marketing efforts to determine what their appropriate REMA could be.

Mapping is a powerful tool in determining a lender’s REMA. Consider preparing maps that show application and origination distribution by both tract income and tract minority-concentration levels. Pay particular attention to lending volume outside the boundaries of the defined assessment area. Is that volume significant? While the term “significant” is relative, the absence of firm, well-defined guidance from examiners indicates there is no one-size-fits-all benchmark.

CRA and REMA goals

The challenge for compliance departments is the need to analyze data and set goals for two different geographic areas: a defined assessment area for compliance with CRA, and a REMA that is utilized in fair-lending analysis. Therefore, lending distribution should be analyzed and compared with a view toward both the assessment area and REMA.

Where possible, it may be beneficial to create maps that show both the assessment area and the expanded REMA. This type of consolidated view can be valuable in understanding performance from both a CRA and fair-lending perspective, as well as for setting goals that complement each regulatory obligation.

Although some lenders are less reliant on physical locations today, brick-and-mortar branches remain an integral part of CRA and fair-lending redlining analysis as well. Despite a lack of specific guidance on appropriate benchmarks in regard to branch locations, a good starting point is to understand the county demographics.

What percentage of the tracts within a county are low-income, moderate-income, or majority minority? What percentage of branch locations are in low-income, moderate-income, or majority minority tracts? This information is useful in future branching decisions. If an institution is planning to open a branch in a low-income area for CRA purposes, is there a low-income tract that also is majority minority that could assist with fair-lending performance as well?

Mapping can be a powerful tool here again, providing a visual of the branch distribution. Maps with application or origination volume can give insight into how well the branch network is being leveraged. As with assessment-area analysis, any impediments or limitations to branching should be thoroughly understood and well-documented. Goals can then be set for opening or closing branches with consideration for both CRA and fair-lending implications.

Lending-distribution goals

Analysis of assessment areas and branch distribution provides a solid understanding of a lender’s geographic area. The next step, however, is to truly understand how well the area is being served. HMDA and CRA data is generally the starting point for most institutions. Additionally, some lenders choose to analyze other additional consumer product types and services as well.

When setting goals for lending distributions, there are several key points to consider. First, what comparative factors should be evaluated? Consider aggregate-lending data that is inclusive of all HMDA data for the geographic area, aggregate-lending data that excludes nonbank contributors, individual peers or peer groups, and demographic data.

Second, determine how much lending is enough. The reality is there is no consistent rule for setting an appropriate goal or benchmark. Generally, there should be a marked level of concern at or below 85 percent of the comparative factor. If applications or originations fall below 50 percent of the comparative factor, those areas should unquestionably become a companywide priority.

Experience suggests that if a lender is seeking an outstanding rating, performance goals should be set even higher than the standard. It also is critical that other regulatory areas, particularly UDAAP (Unfair, Deceptive or Abusive Acts or Practices) and fair lending, are adequately monitored to ensure there are no issues that could adversely affect the CRA rating.

Also, remember that not all goals will be quantitative in nature. Some goals will be more qualitative. Setting goals for community-development activities, including those that are high-impact and/or innovative and flexible, is equally as important because these types of activities can be used to offset other areas of underperformance in some cases.

Finally, know that a picture is worth a thousand words. Mapping is essential. Mapping with geographic analysis provides a clear and transparent visual representation of application and origination volumes. Maps also highlight any holes or gaps in lending distribution. If there are tracts with no, or very limited, application or origination volumes, for example, further research and documentation is warranted.

Increasingly, regulators and consumer-advocacy groups are using maps, so lending companies should as well. Consider creating maps showing both tract income level and tract minority concentration together. This allows management to reference a single map to fully understand both CRA and fair-lending performance, and to help align goals.


Documenting marketing efforts is a common struggle, but is becoming a larger focus during examinations, particularly for fair lending and UDAAP. To be safe, lenders should document as much as possible around marketing campaigns, including the following:

  • Channel. Is it print, radio, television, direct mail, or social media? 
  • Message. Is it brand-only or specific to a certain product or product type?
  • Target market. Was the effort specific to certain geographic regions, such as a radius around branches, or to limited population segments, such as homeowners?
  • Results. How are results pertaining to specific campaigns captured? Understanding the application rate and subsequent origination rate is important to determine the effectiveness of the campaign and to assist in defining future goals.

Marketing data should be compiled, analyzed and used by the compliance team to work with marketing on future campaigns that also help with compliance goals. If mailers were sent to a radius around a branch location, for example, maps can be utilized to get a visual of what those surrounding tracts look like and the success of the marketing effort.

The lender can then identify areas to focus on in future campaigns, such as a broader radius. At minimum, lenders need a solid set of data to emphasize their efforts to be inclusive in their marketing efforts and that supports a plan for setting goals going forward.

•  •  •

Once the analysis is completed, remember that communication is key. Far too often, completed analysis is not adequately shared throughout an organization. Ideally, CRA, fair-lending, HMDA and UDAAP staff can work together to help the compliance team combine the analysis and coordinate with senior management, marketing, and originators to develop goals for the lenders that also align with compliance/regulatory goals. Banks, lenders and mortgage companies are clearly facing numerous challenges in the current environment. Start by finding out where you are, and then work together to coordinate a plan to get where you want to go.


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