Consumer Compliance Outlook
The 2010 Census Data and Its Impact on HMDA, CRA, and Fair Lending Compliance
The census of the U.S. population is mandated by Article 1, §2 of the Constitution to reapportion seats in the U.S. House of Representatives every 10 years based on population changes. But the census also plays a critical role in the consumer compliance examination process. Regulators rely on census data to help assess compliance with the Home Mortgage Disclosure Act (HMDA) and the Community Reinvestment Act (CRA) and to perform fair lending examinations.
The most recent census was completed in 2010, and the Census Bureau and the Federal Financial Institutions Examination Council (FFIEC) recently published data from this census. As a result, the FFIEC has made corresponding changes to its publicly released census data files. The FFIEC has also changed the way census data will be used in the consumer compliance examination process. This article recaps recently released FFIEC information about the 2010 census data and discusses the implications of the 2010 data changes for HMDA, CRA, and fair lending.1
THE AMERICAN COMMUNITY SURVEY
Until 2000, the Census Bureau collected demographic, social, and other data every 10 years through the Supplemental Survey. In 2005, the Supplemental Survey was replaced by the American Community Survey (ACS), an ongoing survey that provides data every year, because Congress was concerned about rising costs and falling census response rates. In addition, Congress wanted more timely survey sample data for policy purposes, noting that decennial census data were out of date not long after their release and became less useful over time. The new ACS includes data on race, Hispanic origin, age, sex, income, disability, and housing characteristics.
Key dates for the 2010 census data are:
- Summer 2011: The Census Bureau released 2010 decennial census race and ethnicity data using 2010 tract boundaries.
- December 2011: The Census Bureau released its 2006-2010 ACS estimates.
- January 2012: HMDA reporters started using 2010 census tract identifiers for 2012 HMDA- and CRA-reportable loans, and the FFIEC updated its geocoding system using 2010 street address/census tract correspondence.
- March 2012: Reporters submitted 2011 HMDA and CRA data using 2000 census tracts and income.
- June 2012: The FFIEC released an updated census demographic file, including revised median family income estimates, population and housing characteristics, population counts by race and ethnicity, percent minority, and median age of housing stock.
Additionally, the 2010 Office of Management and Budget's Standards for Delineating Metropolitan and Micropolitan Statistical Areas are currently scheduled to be released in 2013.2
The FFIEC also announced that it will use the 2006-2010 five-year estimate data from the ACS to create a new census data “base” file. The file data are used to provide context for HMDA and CRA data.3 Although the five-year data estimate is updated as a rolling average on an annual basis, the FFIEC will only update the base file every five years. The 2010 census data have resulted in many new census tracts as well as the redefinition of the boundaries of some existing tracts. Updating the base file every five years will minimize the compliance burden that would result from more frequent updates and provide more up-to-date data than decennial updates, which institutions can use in their compliance programs and to monitor demographic changes in the markets they serve.
Finally, the FFIEC announced that beginning in 2012 it will calculate the annual median family income (MFI) data previously calculated by the U.S. Department of Housing and Urban Development. The 2012 MFI data will incorporate the ACS data and will be referred to as FFIEC MFI data. The MFI data using ACS data were released in June 2012.
IMPLICATIONS OF THE 2010 CENSUS DATA FOR HMDA, CRA, AND FAIR LENDING
The new 2010 census data include changes in the number of census tracts and changes to census tract boundaries. Because HMDA requires lenders to report the property location of HMDA-reportable loans by census tract, institutions relying on third-party or proprietary geocoding systems should ensure that their programs have been updated to reflect the current census data. The Board of Governors of the Federal Reserve System (Board) recently released a Consumer Affairs (CA) letter4 addressing examination issues related to the 2010 census data. The CA letter discusses the use of 2010 census data for financial institutions subject to CRA evaluations by the Federal Reserve. For HMDA data collection, the letter indicates that beginning January 1, 2012, institutions must collect 2012 HMDA data using the updated 2010 census tract information, as indicated in the FFIEC 2010 Census Update Notice.
CRA Performance Evaluations
Census Tract Changes. CRA examiners evaluate a financial institution's performance in meeting the credit needs of low- and moderate-income areas based on demographic information provided by the census, which identifies census tracts as upper, middle, moderate, or low income. Changes in tract designations from low or moderate income to middle or upper income, or the reverse, could have a major impact on an institution's CRA profile. For example, a bank may see changes to the distribution of its branch locations across tracts of different income categories. A branch previously in a census tract designated as moderate income may now be a middle-income tract or vice versa. The same may hold true for community development investments originally made in a moderate-income tract that is now designated as middle income.
For each income category of census tract, Figure 1 depicts the relative degree of stability or change in income classification from the 2000 to the 2010 census. (For this analysis, the data were restricted to those census tracts that had little or no change in their boundaries.) For example, the pie chart labeled “Upper-Income Tracts, 2000” shows the highest degree of stability, with 80 percent of tracts remaining upper income, while 20 percent of upper-income tracts moved to the middle-income classification in the 2010 census. The pie chart labeled “Moderate-Income Tracts, 2000” conveys the least stability, with 35 percent of the tracts shifting to a different income classification in 2010. In particular, 17 percent of the tracts that were moderate income in the last census moved to the low-income classification, while 1 percent of those tracts moved to an upper-income classification. The effect of these changes on any particular market may vary widely, so it is important for financial institutions to analyze how the changes affect the specific assessment areas they serve.
One important question raised by the census changes is their effect on CRA consideration for multi-year investments. For example, suppose a financial institution, in 2008, made a qualified CRA investment that spanned five years. When the investment was made, it qualified for CRA consideration because of its location in a low- or moderate-income tract, as defined by 2000 income tract data. The 2010 census reveals that the area is no longer low or moderate income, but middle income. How is the financial institution's investment considered under a CRA evaluation conducted in 2013?
CA Letter 12-4 discusses the effect of the census changes on CRA performance evaluations. The letter makes it clear that “the eligibility of a loan, investment, or service as a community development activity is based on demographic information available to the bank at the time the activity is undertaken” (emphasis added). Community development investments made in low- or moderate-income census tracts will continue to qualify for CRA consideration even when the income designation of the tract changed as a result of the 2010 census.
The changes in the income designations of particular tracts have a more immediate impact on the evaluation of lending performance, however. Figure 2 displays the national distribution of loans reported for 2010 based on the census tract income classifications using 2000 census data and what percentage of those loans would be in tracts of a different income level using the 2006-2010 ACS data.
An analysis of the data indicates that 24 percent of 2010 loans made in moderate-income tracts, as defined by the 2000 census (reflected in the pie chart “Loans in Moderate-Income Tracts, 2000”), would have been in either a middle- or upper-income census tract using the 2010 census data. Although it is a shift of lesser magnitude, 2010 census definitions resulted in 9 percent of 2010 loans defined in the 2000 census as low-income tracts being in either a middle- or upper-income tract. Significantly less movement among the tract income classifications occurs at the higher end of the income spectrum. Most of the loans in middle-income tracts as defined by the 2000 census would remain in such a tract or be classified as a loan in an upper-income tract under the 2010 tract definitions. Under the 2010 tract definitions, all loans in upper-income tracts would be considered upper or middle income.
Examination Guidance. CA Letter 12-4 discusses the use of 2010 census data for financial institutions subject to CRA evaluations by the Federal Reserve. Beginning January 1, 2012, institutions must collect 2012 HMDA and CRA loan data using the updated 2010 census tract information. CRA examiners will rely on the 2000 census data to assess lending performance in 2011 and the 2010 census data to assess lending performance in 2012 and subsequent years.
Examiners will also review bank assessment area designations to verify that financial institutions adequately adjusted their assessment areas based on differences in the census tract delineations under the 2010 census data. Bankers should identify any changes to their assessment area(s) and determine whether they need to change their approach to marketing and lending as a result of changes in census data. The income-level categories assigned to census tracts are a part of the performance context that is considered when the bank's performance is reviewed. Examiners will consider any changes to income-level categories as they review and evaluate the performance of a bank and its peers or similarly situated institutions using the appropriate census data.
Assessment Areas and Branches. In 2010, the number of overall census tracts in the country increased by more than 11 percent. While some financial institutions may have experienced little change in the tract configuration of their assessment areas, for others, the changes could be considerable. Therefore, when re-examining existing assessment areas, institutions should include a review of the location of branches to ensure that assessment area boundaries reflect census tracts based on the latest data. Further, when financial institutions review their assessment areas, they should evaluate the boundaries according to the more recent census data to be sure they are not inadvertently excluding any census tracts. The implementing regulation for the CRA specifically prohibits a financial institution from “arbitrarily exclud[ing] low- or moderate-income geographies, taking into account the bank's size and financial condition.” See 12 C.F.R. §228.41(e)(3).5
Demographic Changes. Demographic changes will also have an impact on CRA assessment area profiles. For example, the 2010 census indicates a rapidly aging population,6 with more people 65 years and older than in any previous census. This could have CRA implications because credit needs may change as individuals age. When a trend appears across an entire community, it can drive business decisions about the mix of products and services offered. The aging of America, however, is just one demographic change that can represent both a challenge and an opportunity for financial institutions as they develop strategies for meeting their CRA obligations. Financial institutions will want to continually evaluate credit needs in their assessment areas in the context of demographic changes to ensure that their products continue to meet these needs.
Fair Lending Evaluations
Fair lending analysis incorporates the use of census tract minority-level data. The 2010 census data reveal significant changes in minority-level data since the 2000 census. For example, according to the Census Bureau's “Overview of Race and Hispanic Origin: 2010,” about 10 percent (348 of 3,143) of U.S. counties are now majority-minority.7 Majority-minority states include California, Hawaii, New Mexico, and Texas, and the District of Columbia.8
The overall population increased by 27.3 million, from 281.4 million in 2000 to 308.7 million in 2010. Approximately 56 percent of that change resulted from an increase in the Hispanic population, which increased from 35.3 million in 2000 to 50.5 million in 2010.9 The Asian population also experienced a large change, growing from 10.2 million in 2000 to 14.7 million in 2010, a 43.3 percent increase.10 According to the Census Bureau's report on “The Black Population: 2010,” the black population grew in all four regions of the country, growing from 34.6 million in 2000 to 38.9 million in 2010, led by growth of 18 percent in the South and the West.11
The Board relies on census tract data to identify lending disparities. This issue was discussed in a recent Outlook article on fair lending, which noted: “For both mortgage and nonmortgage products, [the Board] also uses census data to identify majority-minority census tracts and to determine whether disparities exist between minority and nonminority areas.” (See “Fair Lending Webinar Questions and Answers,” Consumer Compliance Outlook, First Quarter 2012.) The article also noted that census tract data are used in a redlining review to measure how a creditor's lending in minority tracts compares with other creditors' lending in those tracts.
Financial institutions should examine whether the minority composition of their assessment areas changed from the 2000 to the 2010 census. For example, if a portion of an institution's assessment area now contains significant minority populations according to 2010 census data, the institution should reevaluate its redlining risk. Issues to consider include whether the institution has updated its marketing to reflect the minority population changes in the affected assessment area or whether there are gaps in credit extended to qualified minority applicants that need to be evaluated and addressed.
Figure 3 depicts the extent of such changes at the national level. For example, overall, 29 percent of the tracts that were low minority in 2000 (less than 10 percent minority population) are now moderate-minority tracts, while 25 percent of the tracts that were middle minority in 2000 are now high-minority tracts (more than 80 percent minority population).
The 2010 census data will affect the delineation of census tracts and assessment areas as well as demographic information relating to income, race, and ethnicity. These changes may affect an institution's ability to receive CRA credit for community development activities as well as its fair lending assessments. Therefore, institutions should evaluate how census tract changes in their lending areas may affect their fair lending and CRA performance and implement any changes needed to lessen any potential fair lending risk and ensure satisfactory CRA performance going forward. Specific issues and questions should be raised with your primary regulator.