What Is a REMA and What Should You Do About It? - Carl G. Pry
Carl G. Pry
ABA Bank Compliance
The attention regulators have placed on fair lending issues lately is obvious. In its April 2017 Fair Lending Report, the Consumer Financial Protection Bureau announced its top three fair lending priorities, which in the Bureau’s opinion, “present substantial risk of credit discrimination for consumers.” First on the list was redlining (the other two were mortgage and student loan servicing, and small business lending). As to redlining, the Bureau stated, “We will continue to evaluate whether lenders have intentionally discouraged prospective applicants in minority neighborhoods from applying for credit.”
The FFIEC’s August 2009 Interagency Fair Lending Examination Procedures define redlining as “a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located.”
Examiners look at a bank’s geographic distribution of applications and loans, and compare that performance against the bank’s peers to discern whether there are any differences or conspicuous gaps. But what is the specific geographic area being examined? This is where the concept of REMA comes in.
First things first: REMA stands for Reasonably Expected Market Area. In short, it is the geographic area “where the institution actually marketed and provided credit and where it could reasonably be expected to have marketed and provided credit,” according to the Fair Lending Exam Procedures.
Note that this is not a new concept, as those exam procedures were published nearly eight years ago. Why then are we hearing about it just now? Good question, but one that could be answered by increased attention on redlining generally as well as the difficulty in identifying how and where to look when a residential lending redlining analysis is performed. (It should be noted that the FDIC in particular is asking banks it supervises about REMAs, although other agencies are also asking. Representatives of the Bureau have stated that REMA is not a critical topic for them quite yet, however.)
In constructing a comparative analysis, REMA is part of the examiners’ scoping exercise. Step 1 in that process directs the examiner is to “[i]dentify and delineate any areas within the institution’s CRA assessment area and reasonably expected market area for residential products that are of a racial or national origin minority character.”
Notice the mention of the bank’s CRA assessment area in that statement. Is it accurate to say the assessment area is where the bank’s geographic pattern of lending should be analyzed? After all, the April 2014 Interagency CRA Examination Procedures (for Large Banks) say the examiner should “Review any analyses prepared by or for and offered by the institution for insight into the reasonableness of the institution’s geographic distribution of lending.” That sure sounds like redlining analyses. Is the REMA therefore the same as the bank’s CRA assessment area?
The answer is no. According to the Fair Lending Exam Procedures, although the “CRA assessment area can be a convenient unit for redlining analysis because information about it typically already is in hand…the CRA assessment area may be too limited.” Since a “redlining analysis focuses on the institution’s decisions about how much access to credit to provide to different geographical areas,” it may not be appropriate to use the assessment area alone. In fact, the FDIC, in a March 2017 presentation to bankers, stated that “some REMAs might be beyond or otherwise different from a bank’s CRA assessment area.”
How then to determine what the REMA should be? Pay attention to the term “Market” in the REMA acronym and the phrase “where the institution actually marketed” in the definition. Marketing residential loan products is as important in this definition as where applications were received and loans made. The term “Trade Area” is also used by the FDIC; it is “the area where the bank primarily markets and lends.” The FDIC notes this is not based on branch locations and is typically larger than the CRA assessment area. But then the REMA may or may not be the same as a bank’s Trade Area, either.
So then, with all these confusing and subjective definitions and explanations, how should a bank determine what its REMA is? The FDIC did provide, in an October 2016 presentation, a list of factors that go into determining a bank’s REMA:
1) Where the bank has actually received applications; and 2) Where the bank has originated loans.
These make sense, as it is entirely logical to include in the REMA where the bank received applications and made loans. Any normal redlining analysis would include those areas where the bank actually does business. This may extend beyond the bank’s CRA assessment area, particularly since REMA focuses on residential mortgage lending and CRA on business and community development lending.
3) The bank’s branching structure and history (including closures, acquisitions, and relocations); and 4) The bank’s history of mergers and acquisitions.
Similar to the determination of the CRA assessment area, the bank’s physical presence should be taken into consideration when considering its market area. It would be hard to imagine a REMA that did not include where the bank actually was, but it is conceivable. Conclusive evidence and a convincing argument would have to be made to exclude a branch location, however.
5) The market area as defined by the bank in its written policies; and 6) Advertising.
This is where subjectivity really enters the equation. Where does the bank intend and attempt to do business? Where does it envision its customers (meaning mortgage loan applicants and borrowers) coming from? What is the bank’s “footprint,” meaning where it says it does business? Look to the bank’s policies and other similar statements, as well as print advertising, calling programs, and direct mailings for clues. Where brokers and/or realtors with whom the bank cooperates should also be considered.
Since this is a redlining exercise, whether the bank is providing equal access to credit within its REMA is the eventual question.
Among others, regulators will look at whether the bank is:
• Targeting areas with less advantageous products;
• Offering different loans to different areas; and/or
• Not marketing residential loans in certain areas.
7) The inappropriate exclusion of MMTs (majority-minority tracts, where minorities comprise at least 50% of the population) from the assessment area.
This is a nod to CRA concepts again, as the CRA Exam Procedures, state, “if areas of low or no penetration were identified, [the examiner should] review explanations and determine whether action was taken to address disparities, if appropriate.”
Two additional, and essential, facts to understand about the REMA concept are stated in the FDIC’s October 2016 presentation: (1) the REMA is “not defined by fair lending laws”; and (2) it is “not selected by the bank.”
While there is no reference to REMA in ECOA, Regulation B, or the FHA, there is plenty of information around what the REMA is all about, as illustrated here. On the other hand, if it is the regulator, and not the bank, who selects its REMA the bank would instantly be put on the defensive. How can a bank respond to a REMA-related redlining issue when it is not the bank that even selects what its REMA is?
The answer is the old adage that the best defense is a good offense. In this context it means doing your homework: understand the concept and determine what you believe constitutes your bank’s REMA. That way, if or when the discussion arises with your examiner, you can have a logical and informed discussion (or even a debate) around what your bank’s REMA is, and whether there is a reasonable expectation of whether your bank should be expected to be doing business there.