February 28, 2023
Mr. Craig Cellini
Rules Coordinator
Illinois Department of Financial and Professional Regulation
329 West Washington, 3rd Floor
Springfield, IL 62789
Via Email: Craig.Cellini@Illinois.gov
RE: NCRC’s Written Testimony for the Bank Community Reinvestment Hearing on March 2, 2023 Code Citation: 38 Ill. Adm. Code 345
Dear Mr. Cellini:
The National Community Reinvestment Coalition (NCRC), an association of over 600 community organizations dedicated to increasing access to credit for underserved communities, appreciates this opportunity to comment on the Notice of Proposed Rules (NPR) implementing the Illinois Community Reinvestment Act (ILCRA). We applaud the elected officials, community-based organizations, and other stakeholders who made the ILCRA possible, but improvements must be made to the proposed framework in order for it to better align with the intent of the ILCRA and ultimately to achieve the goal of ensuring that the financial needs of all Illinois residents are well served. In particular, the ILCRA must incorporate race into the proposed performance tests and ratings. These changes can be structured to withstand potential legal challenges under current jurisprudence.[1] We also make a number of additional recommendations for ILCRA implementation, to be discussed in further detail in our forthcoming comment letter.
Factoring Race into Performance Tests
The ILCRA, like the federal CRA, establishes that covered institutions “have a continuing and affirmative obligation to meet the financial service needs” of the communities where the institution does business.[2] The requirement for banks to serve all communities provides room for the Illinois Department of Financial and Professional Regulations (IDFPR) to incorporate race into the ILCRA performance context and performance tests in specific circumstances in order to encourage institutions to rectify decades of redlining, as well as ongoing discrimination. This can be done to complement an analysis of bank performance based on income, and can be structured to comply with the Equal Protection Clause in order to avoid potential legal challenges.
Where the government is not allocating benefits or imposing burdens on the basis of race, measures (such as improved data analysis to assess disparities) should straightforwardly pass legal muster. Further, governments can act on the basis of race as long as the incorporation of race satisfies the “strict scrutiny” test applied by courts. Strict scrutiny has two basic components. First, the government must have and provide substantial evidence of a compelling interest to justify its consideration of race. Courts have established that remedying the effects of past and present discrimination is a compelling interest, and there is extensive evidence that discrimination continues to impair access to credit despite race-neutral approaches. For example, a recent study showed that four majority-White neighborhoods in Chicago had each individually received more loans than all the Black neighborhoods combined from 2012 through 2018.[3]
Second, the government must act in a manner that is narrowly tailored to achieving its compelling interest. That means several things of particular importance with respect to the ILCRA. First, race-neutral alternatives need to be found inadequate, and that race should only be considered with respect to racial groups, bank products, and geographical areas where evidence indicates that access is currently curtailed due to past or present discrimination.
The Inability of Race Neutral Alternatives to Address Past or Present Discrimination
There is a very strong argument for concluding that race-neutral alternatives are insufficient to overcome the impact of discrimination in lending. The 46-year history of the federal CRA is a telling example. The core components of the federal CRA and its implementing regulations have been race-neutral throughout, with primary attention given to income.[4]
With a structure focused on income and not race, CRA has not sufficiently addressed the continuing extraordinary financial disparities that are the direct result of the persistent effects of redlining and systemic racial bias, as we will discuss more in our written comment.
Updating Performance Context to Detect for Ongoing Discrimination in Order to Narrowly Tailor Race Specific Elements of the Performance Tests
The federal CRA, which the ILCRA is modeled on, establishes that performance context is reviewed in CRA examinations “to calibrate a bank’s CRA evaluation to its local communities.”[5] Adding race to the performance context will greatly increase IDFPR’s understanding of the racial outcomes of the Illinois banking system, and allow the IDFPR to have a much more comprehensive view of how specific institutions covered by ILCRA are responding to credit needs.
The IDFPR should update the performance context factors for all institutions covered by the ILCRA to direct the IDFPR to conduct periodic statistical studies to identify metropolitan areas and rural counties that either experience ongoing discrimination or exhibit significant racial disparities in access to credit. We will provide more detail in our written comment, but this study should look at loan application, origination, and denial rate disparities based on race and ethnicity across different loan purposes using available Home Mortgage Disclosure Act (HMDA) data. The study should also analyze community development loans, investments, and services, as well as branch locations and retail banking services, in majority-white communities and communities that are majority people of color to determine if significant disparities exist in the availability of community development, branches, and retail banking services in communities of color.
Updating performance context in this way should not be controversial from a legal perspective because it does not allocate government benefits or impose sanctions based on race. This would be comparable to a host of race-based information already collected and published by the government, such as HMDA data and the census.
How to Apply Race to The Proposed Performance Tests and Ratings
To satisfy narrow tailoring requirements, race should not automatically be included in all aspects of performance tests and ratings. Rather, race should factor only when the IDFPR’s study identifies that access to credit is currently negatively impacted by the continuing effects of past or present discrimination with respect to (1) a specific racial or ethnic group, (2) a specific product and (3) the specific assessment area evaluated.
NCRC will be submitting a written comment that provides specific recommendations for how to update the proposed performance tests and ratings.
Additional Improvements
In addition to the changes recommended above, the implementation of the ILCRA would be improved by:
- focusing on loan originations instead of loan purchases;
- automatically including activities of affiliates, instead of allowing banks to choose if affiliates activities will be evaluated;
- breaking out additional assessment areas for mortgage lenders;
- requiring census tract level disclosure of community development loans, investments, and services; and
- further promoting public participation in ILCRA evaluations through the creation of a public registry where organizations can sign up to be contacted regarding commenting on banks’ CRA performance.
Each of these recommendations will be discussed in further length in our written comment.
Closing
Adoption of these proposals will give the IDFPR a deeper understanding of whether banks are meeting the needs of their entire communities, beyond the crucial but too narrow focus on income. It will motivate banks to expand their focus in the same way. Ultimately, these recommendations will strengthen the ILCRA and help it achieve its goal of ensuring that everyone in Illinois has fair access to the critical products and services provided by banks. Thank you for the opportunity to comment.
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[1] See also our full discussion of these legal considerations in the context of the federal CRA, at https://ncrc.org/adding-robust-consideration-of-race-to-community-reinvestment-act-regulations-an-essential-and-constitutional-proposal/
[2] Illinois Community Reinvestment Act – Public Act 101-657. Section 35-10, subsection A.
[3] “Where Banks Don’t Lend.” WBEZ Chicago and City Bureau. June 3 2020. Available online at https://interactive.wbez.org/2020/banking/disparity/
[4] 12 U.S.C. § 2903(a)(1); 12 C.F.R. § 228.11(b)(1) and 12 C.F.R. § 228.12(g)(4)(iii)(A) (rates of unemployment and population loss).
[5] 2020 ANPR, 85 Fed. Reg. 66410 at 66414
