We are a community bank in a large metropolitan market. Our assessment area includes several cities. One City has approached us and requested that we partner with them by providing an interest rate break on home improvement loans to homeowners within the City. In turn the City will promote the product on the City's cable access station, website, and in community bulletins. We of course want to maintain a stong relationship with the City folks, and would love to have them help us advertise. My question, can we "discount" loan rates within this community which is a small portion of our assessment area without running into fair lending problems. Our assessment area includes 355 tracts - 5 low-income, 31 moderate, 174 middle, and 143 upper. The community we are talking about is made up of 7 tracts, 1- moderate and 6 middle.

The short answer is yes, but be careful. You may offer different prices in different markets. However, you should always be aware of the demographic impact of such practices. Track who is getting these loans and also document your reasons for participating in the program. You also need to decide what you will do if someone from another community asks for the same rate.

Couldn't this cause possible adverse CRA issues?
I am not the CRA expert, but I don't think FFIEC,
examiners, et al, will take a shine to it. And what will
happen when a not so desirable community asks for
you to participate in a similar campaign?

Let me get this right - a city has approached you and asked you to help provide lower cost home improvement loans to citizens within their city. What's the risk? Isn't this the whole spirit of CRA? The city identified a credit need and asked for help and you say "you betcha - we'll help!". I think that a examiner would have to be off their rocker to site you for any type of "fair lending" problem on any loans you might make. Not only that, I would have it fully documented and point out to the examiners the flexibility in designing credit products to meet the credit needs identified within the community by a government entity. The area includes a moderate tract - so what's the problem????

In reply to:

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And what will happen when a not so desirable community asks for you to participate in a similar campaign?

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Can I ask what the heck this statement means? Sounds like a redlining issue!

More than likely, the city is using some type of government subsidy (HUD grants perhaps) and the lower-rate program will be available to those who qualify as low-moderate income according to HUD guidelines.

As long as you can cover your bases on documentation, potential FCRA issues if the city wants to look at the credit reports, and any other potential liability issues that you should have legal counsel review, this type of program will probably greatly enhance your CRA performance.

Good golly - we get as paranoid about potential fair lending impact as we do about privacy on stuff that should really be slam-dunkers!

Ah...convoluted regulatory mazes - how we love you for the job security you give us....

"You'll betcha- we'll help!" was my first reaction when I met with the folks from the City. Then when I sat down with my consumer lender to draft the criteria for the program, I started getting paranoid. (Surprising that a compliance officer would have that happen, isn't it?). My plan is to draft a program that we are comfortable enough with that we would offer it to any other City in our assessment area if asked. Of course, that probably means the program won't vary much from what we offer to the general public. Thank you all for your help.