New Illinois Law Prescribes CRA Obligations for Non-Depository Mortgage Lenders

On March 23, 2021, the Illinois Community Reinvestment Act (“ILCRA”), Senate Bill No. 1608, was signed into law, Public Act 101-0657, and became effective. The ILCRA imposes continuing and affirmative community investment obligations on covered financial institutions, which include non-depository mortgage lenders. This note reviews and comments on key provisions of the ILCRA.

Covered Financial Institutions

The ILCRA applies to covered financial institution (“CFI”), which includes, Illinois charted depositories (banks and credit unions), and entities licensed under the Illinois Residential Mortgage License Act of 1987 (“ILRMLA”), which lent or originated 50 or more residential mortgage loans in the previous calendar year. The ILCRA does not define the terms “lent” or “originated” and the scope of these terms is currently unclear. How these terms will be defined will be important to some ILRMLA licensees, as the ILRMLA license covers entities performing various mortgage market activities, i.e., mortgage brokers, lenders, services, and secondary market purchasers. While it is likely that these terms would cover brokers and lenders, it is unclear whether these terms also cover servicers and secondary market purchasers, unless the terms “originated” or “lent” would be defined to include mortgage loan modifications and purchasing mortgage loans.

Obligation to Meet the Financial Services Needs of Local Communities

The ILCRA imposes a continuing and affirmative obligation to meet the financial services needs of the communities in which a CFI has offices, branches, and other facilities are maintained. In addition, if a CFI provides all or a majority of its products and services via mobile and other digital channels, it has a continuing and affirmative obligation to help meet the financial services needs of deposit-based assessment areas, including areas contiguous thereto, low-income and moderate-income neighborhoods, and areas where there is a lack of access to safe and affordable banking and lending services. However, these obligations are imposed in a manner consistent with the safe and sound operation of the CFI.

The ILCRA tasks the Secretary of Financial and Professional Regulation, or its designees from the Illinois Department of Financial and Professional Regulation (“IDFPR”), with assessing the records of each CFI’s compliance with the ILCRA obligations. To conduct such compliance assessment, the IDFPR is required to adopt rules which must cover the assessment of the following factors:

• Activities to ascertain the financial services needs of the community, including communication with community members regarding the financial services provided;
• Extent of marketing to make members of the community aware of the financial services offered;
• Origination of mortgage loans, including, but not limited to, home improvement and rehabilitation loans, and other efforts to assist existing low-income and moderate-income residents to be able to remain in affordable housing in their neighborhoods;
• For small business lenders, the origination of loans to businesses with gross annual revenues of $1,000,000 or less, particularly those in low-income and moderate-income neighborhoods;
• Participation, including investments, in community development and redevelopment programs, small business technical assistance programs, minority-owned depository institutions, community development financial institutions, and mutually-owned financial institutions;
• Efforts working with delinquent customers to facilitate a resolution of the delinquency;
• Origination of loans that show an undue concentration and a systematic pattern of lending resulting in the loss of affordable housing units;
• Evidence of discriminatory and prohibited practices; and
• Other factors or requirements as in the judgment of the IDFPR reasonably bear upon the extent to which a CFI is meeting the financial services needs of its entire community, including responsiveness to community needs as reflected by public comments.

ILCRA Examination

The ILCRA authorizes the IDFPR to examine CFIs for compliance with ILCRA, and to set examination schedules and frequencies and to impose fees for such examinations. ILCRA compliance examination may cover the CFI’s entire books, records and operations. In addition, the ILCRA examination may also cover compliance with applicable state and federal fair lending laws, such as the Illinois Human Rights Act, the federal Equal Credit Opportunity Act and Home Mortgage Disclosure Act.

 Report of Examination

The ILCRA requires the IDFPR to prepare a written report of the CFI examination parts of which, will be made public and will provide information no less than that provided under the Federal Community Reinvestment Act. A CFI will have an opportunity to review and comment on the report of examination and the public will have opportunity for inspection and comments on the public part of the report.

The CFI report of examination must include the following components:

• the assessment factors utilized to determine the CFI’s descriptive rating;
• the Secretary’s conclusions with respect to each such assessment factor;
• a discussion of the facts supporting such conclusions;
• the CFI’s descriptive rating and the basis therefor; and
• a summary of public comments.

The CFI’s descriptive rating of compliance with the ILCRA will be one of the following 4 ratings:

• Outstanding record of performance in meeting its community financial services needs;
• Satisfactory record of performance in meeting its community financial services needs;
• Needs to improve record of performance in meeting its community financial services needs; or
• Substantial noncompliance in meeting its community financial services needs.

Public Notice Requirement

The ILCRA requires CFIs to provide, in the public lobby of each of its offices, if any, and on its website, a public notice that is substantially similar to the following:

“STATE OF ILLINOIS COMMUNITY REINVESTMENT NOTICE

The Department of Financial and Professional Regulation    (Department) evaluates our performance in meeting the financial services needs of this community, including the needs of low-income to moderate-income households. The Department takes this evaluation into account when deciding on certain applications submitted by us for approval by the Department. Your involvement is encouraged. You may obtain a copy of our evaluation. You may also submit signed, written comments about our performance in meeting community financial services needs to the Department.”

Consequence of Compliance Ratings

The ILCRA requires the IDFPR to takes into consideration the compliance record of a CFI (including its parent and subsidiary) under the ILCRA, when it applies for:

• Establishment of a branch, office, or other facility
• The relocation of a main office, branch, office, or other facility
• A license renewal
• Change in control
• Mergers or acquisition

Importantly, the CFI record of compliance with the ILCRA obligations may be the basis for the denial of any such applications.

Legislative Development

Illinois charted depositories (banks and credit unions) were quick to react to the passage of the ILCRA. On February 19, 2021, after the ILCRA was passed by the Illinois legislature but before it became law, a new legislation was proposed, House Bill No. 3694, which would remove Illinois charted depositories from the definitions of CFI under the ILCRA. If this bill becomes law, it would leave only non-depository mortgage lenders to be subject to the ILCRA obligations.

Takeaways

Non-depository mortgage lenders traditionally were not subject to community reinvestment obligations because, as unlike banks, they did not make loans using depositors money. Instead, non-depository mortgage lenders use their own private funds to provide financial services, and for this reason historically they were not required to “reinvest” depositors money back in the communities in which they operated. The ILCRA changes this paradigm, and imposes a new community investment (rather than the misnomer “reinvestment”) obligations on non-depository mortgage lenders.

While the ILCRA is well intentioned, it will most likely result in additional costs related to compliance and examinations, especially for non-depository mortgage lenders. It may also lead to additional fair lending enforcement action against CFIs as a result of ILCRA examinations. Finally, depending on how the IDFPR defines assessment areas for the purposes of ILCRA compliance, it may require CFIs to conduct marketing and outreach in areas that they did not cover or operated before.

As the IDFPR begins drafting rules to implement the ILCRA, CFIs must take the opportunity and be engaged in the rule making process by providing meaningful comments to the IDFPR. Such comments should aim, among other things, at tempering the rules requirements with safety and soundness consideration, to ensure that CFI can operate in a profitable manner while complying with the ILCRA.

If you have any questions concerning the ILCRA or need assistance with its implementation, please contact Solomon Maman.