Banks that are swapping out branches for enhanced technology could be leaving themselves open to claims of discrimination.

The concern among some industry observers is that low- to moderate-income groups, particularly minorities, potentially lack an appropriate level of access to online and mobile banking products. Whether technology is a sufficient substitute for a brick-and-mortar offices is a complicated issue that evokes passionate responses.  

Regulators are trying to take technological changes into account when it comes to compliance with laws such as the Community Reinvestment Act, observers said. Still, banks must carefully review any branch decisions and document the reasons for any closings.

"Sometimes you have to cut costs," said Philip Smith, president of Gerrish McCreary Smith. "Now that we have mobile banking, shouldn't we provide that service in lieu of branches or at least in addition to that? That's where most banks are heading and that leads to initial concerns from some."

Regulators are actively pursuing discrimination claims against lenders, said Warren Traiger, a lawyer at BuckleySandler. Banking regulators are making "a lot of referrals" to the Justice Department, especially tied to redlining. In cases involving redlining claims, he said that allegations are often made that an insufficient number of branches exist in minority neighborhoods. 

Justice Department official and the head of fair lending at the Consumer Financial Protection Bureau recently warned that redlining — where lenders charge more for products or exclude minorities in certain geographic areas — is still an issue.

Evans Bancorp agreed last week to pay $825,000 to settle a lawsuit that accused the Hamburg, N.Y., company of intentionally avoiding mortgage originations in Buffalo neighborhoods with big minority populations.

Regulators can use branch placement to support redlining claims, comparing the number of locations to the amount of lending activity in an area, industry experts said. Scores for the Community Reinvestment Act can also be negative affected by closing branches in low- and moderate-income neighborhoods.

"If, in the regulators' minds, the data show insufficient loan origination activity in minority areas, then they will start to scratch the surface and ask why," Traiger said. "The bank hopes that market and business factors will explain any alleged deficiency, but sometimes the regulator believes the answer is a lack of a branch or other presence in that area … or insufficient marketing or outreach." 

Still, customers in low- to moderate-income communities, along with minorities, may end up being disproportionately hurt by branch closings. Banks often use branches to collect deposits, so they are more likely to pare back offices in specific markets, said Tony Plath, a finance professor at the University of North Carolina at Charlotte.

"This isn't true across the board, but banks are maybe closing branches in less-affluent markets," Plath said. "Those tend to be heavily populated by minorities."

The California Reinvestment Coalition, a group that aims to increase access to financial services for low-income and minority communities, point to a plan by Union Bank in San Francisco to shutter branches in San Diego's City Heights neighborhood — a predominantly low-income market with a large number of businesses owned by immigrants — as an example of an area where some customers are being left behind.

"When you close branches, you're taking away from an already depleted set of resources," said Andrea Luquetta, the California Reinvestment Coalition's policy advocate. "There's a tangible impact of banks not serving these areas and pulling out even more."

Union Bank is "thoughtful about where we place our branches and ATMs, while also offering options through online and mobile services," a spokeswoman said in an emailed statement. "Like many banks, we are also responding to shifting market conditions and evolving consumer preferences."

To avoid potential allegations of discrimination, it is vital that bank executives and boards document the reasons for their decisions, especially if a change will affect a low- to moderate-income area or minority customers, industry experts said.

Management should be able to provide data to show the business necessity of closing a branch, said W. Brad Washburn, director at consulting firm Steve H. Powell & Co. It is even prudent to consider other cost-effective ways of serving a community, such as opening a loan production office or moving into a smaller retail space.

"I fully understand why a bank, especially in this day and age, needs to look at operating efficiencies," Washburn said. "I can understand that business decision. But they need to also understand the implications for fair lending and they need to consider low-income customers and senior citizens to make sure they still have a way to continue to service those customers."

As banks close branches and technology evolves, regulators are trying to keep pace. The Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. last year proposed a revised question-and-answer sheet about branches and alternative delivery systems, such as mobile and online banking, for CRA. The proposed changes include placing less emphasis on service via branches, while providing more consideration to other delivery methods.

"Changes in technology and the financial market increasingly provide opportunities for financial institutions to use alternative delivery systems effectively to provide needed services in low- and moderate-income geographies," the proposal said.

The OCC is working through "numerous comments" from various groups tied the proposed Q&A sheet, an agency spokesman said in an emailed statement. "While branch closings are ultimately business decisions under the applicable federal statutes, the OCC is committed to encouraging national banks and federal savings associations to provide services in ways that fully meet the banking needs of their communities, and comply with fair lending and other applicable laws and safe and sound banking practices."

Representatives for the FDIC and the Fed declined to comment.

The Department of Housing and Urban Development, which enforces the Fair Housing Act, has been keeping an eye on evolving banking technology. Banks must still meet the same standard of fairly providing credit to customers, regardless of race, in their defined service area, regardless of whether the loans are made in a branch or online. Lenders can't exclude communities from their service area based on race or national origin, or consider those factors in defining their service area. HUD is already handling cases that arose from phone or online applications. 

"The Fair Housing Act follows lenders into cyberspace," said Bryan Greene, general deputy assistant secretary in HUD's Office of Fair Housing and Equal Opportunity. "Often compliance has to catch up with innovation, but it is something we're aware of. It is also fair to say that the same kind of discrimination that might have occurred in person, in a branch, can also occur online."

Philip Flynn, president and chief executive of Associated Banc-Corp in Green Bay, Wis., said he believes regulators are working to recognize how technology is influencing banking. The $27 billion-asset company, which has closed about a third of its branches in the last eight years, settled claims earlier this year brought by HUD that it had discriminated against black and Hispanic mortgage applicants from 2008 to 2010.

As part of the settlement, Associated agreed to open four loan production offices and one branch, Flynn said. Lending offices can be smaller, require less staffing and use technology, such as image-enabled deposit ATMs, to reduce overall costs.

"We're very cognizant as we consolidate our branches to pay attention to serving low- and moderate-income neighborhoods, as well as anywhere else," Flynn said. "It is absolutely one of the things we look at hard when we think about this."

However, community activists are less than thrilled with such shifts. Concerns linger that, as banks have fewer physical locations and rely more on technology, investment in certain communities will decline.

"On a broader basis, banks are doing more without branches and that undermines CRA," Luquetta said. "Banks are only required to do CRA activities in their branch footprint. As they uproot branches, the less they actually have to serve low-income communities."

Additionally, obstacles, such as language barriers or lack of Internet access, sometimes prevent low-income or minority customers from using online or mobile banking services, some industry observers said.

The National Urban League, the National Council of La Raza and the National Coalition for Asian Pacific American Community Development completed a study last year that looked at how low- and moderate-income minority communities access financial services. Just 11% of respondents were comfortable conducting financial transactions online or with a mobile device. Respondents were also more likely to turn to human interaction, such as asking a bank employee, for financial advice, rather than completing research online.

"There was a lot of skepticism, and that's a teaching point for banks," said Marisabel Torres, a senior policy analyst with the wealth building policy project at the National Council of La Raza. "If banks are encouraging customers to use technology, then they need to make sure there are safeguards in place."

Still, banks are often left feeling that they have few options when they are accused of discrimination. For instance, Associated "spent a tremendous amount of time and energy talking" to HUD about its case, Flynn said. While he was adamant that Associated had never discriminated, Flynn said the company still decided that settling was its best option.

"There are not many more distasteful things you can be accused of," Flynn said. The settlement "doesn't say we were discriminatory. We … would never discriminate, but at some point you need to try and reach some sort of agreement."

Jackie Stewart is a reporter at American Banker.

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