How Banks Game The Community Reinvestment Act By Putting Branches In Neighborhoods That Only Look Low Income

See Never Mind the Ferrari Showroom, Bank Regulators Call This a Poor Neighborhood: Branches in business districts are given low-income designation by a quirk in federal law by Rachel Louise Ensign and AnnaMaria Andriotis of the WSJ. Banks need to pass a test that they are in compliance or they might not be allowed to engage in mergers. Excerpts:

"To any casual observer, the area just south of Trump Tower in Midtown Manhattan is obviously wealthy: The blocks are crowded with skyscrapers, and stores include Versace and Ferrari. Diners can pick at the foie gras and caviar on La Grenouille’s $172 prix-fixe dinner menu.

In the eyes of federal-bank regulations, though, that sliver of New York City is a poor neighborhood where median incomes are relatively low.

The anomaly has yielded a hidden benefit for banks such as J.P. Morgan Chase & Co. and Wells Fargo WFC 1.30% & Co. that have crowded branches into the area. Having robust branch representation in supposedly low-income areas gives them a better score on a key regulatory test that can help determine how fast they expand.

"Neighborhoods like the one in Midtown Manhattan could add a new dimension to the debate, even though branch analysis is only one part of regulators’ broader CRA evaluations. Its quirky treatment under the CRA is due to the fact that regulators who enforce the act rely on older, sometimes unreliable, Census Bureau data to determine an area’s income level.

New York isn’t an isolated example. Six of the 10 most popular poor areas for banks to have branches, including the Manhattan tract, are slated to lose that classification when more recent census data go into effect this year, according to regulators and data from fair-lending software company ComplianceTech. But bank regulators have been using the older data because they stick to a preset schedule of switching every five years.

In one of these census tracts, a “low income” area in downtown San Francisco, one of the most expensive cities in the country, 53 branches pack into an area that census data indicate has only 1,783 residents. That’s 52 more branches than the average poor district in the U.S. has, despite the fact the San Francisco tract has far fewer residents than average.

About 30 miles away in Menlo Park, Calif., a First Republic Bank branch on Facebook Inc.’s corporate campus is classified as lower income because the surrounding areas have lower incomes than the median of the broader area. But the only people with access to the branch are employees and guests of Facebook"

"Then there is Manhattan’s census tract 102, the bustling Midtown blocks with the most lower-income bank branches per capita in the U.S., according to a Wall Street Journal analysis of data from ComplianceTech’s LendingPatterns.com. Due to a paucity of residential buildings in the area, the district bordered by Park and Fifth avenues, 49th and 56th streets has only 230 residents, or about 10 for each of the 22 bank branches that call the tract home, according to the census data used by banking regulators."

"But the areas often have few residential buildings, one reason that can explain the lower-income CRA designation. The fact that banks get credit for branches in these areas, though, has prompted some criticism.

“Banks can conform to the letter of the law, but not meet the purpose of CRA,” says John Vogel, an adjunct professor at Dartmouth’s Tuck School of Business. This is especially the case, he says, in the classification of “low- and moderate-income neighborhoods.”"