WFC Wells Fargo and Company

By Rachel Louise Ensign and AnnaMaria Andriotis 

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 & 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.

It's all part of the Community Reinvestment Act, a roughly four-decade-old federal law designed to stop lending discrimination in low-income neighborhoods. In recent years, lawmakers and regulators have clashed over the legislation's efficacy.

Proponents of the CRA, many on the left, count it as a bulwark for those struggling to keep up in a financial system that has grown more unequal. Critics, mostly conservative, say the law's implementation encouraged banks to make bad loans that contributed to the financial crisis.

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, which paid an average of $189,000 in stock-based compensation last year for each employee globally. Facebook and First Republic declined to comment.

In Washington, guests of high-end hotels in the blocks near the White House and elite lobbying firms have 19 branches to choose from, including three Bank of America Corp. locations. All of the branches give the banks credit for serving a lower-income community.

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.

Visitors to the area can stay in the St. Regis Hotel where most rooms cost more than $1,000 a night or gaze up at the Olympic Tower, a 51-story skyscraper where fashion's Gucci sisters have listed a penthouse for $35 million. A short walk away: Trump Tower, which is in a higher-income district across 56th Street.

Banks have good reasons besides the CRA to be in such areas. They tend to include commercial districts that are densely populated with office workers who might want to visit a bank on a break. Tract 102 also has many tourists visiting. 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."

The CRA was signed by President Jimmy Carter in 1977 to stop "redlining, " a practice where banks wouldn't lend money in poorer or minority neighborhoods. Bank regulators during the Clinton administration added a uniform test as a way to measure compliance more objectively. The hope was that by encouraging banks to do business in lower-income areas, people living there would be able to get affordable loans.

The vast majority of banks examined -- approximately 97% -- received a passing grade on the test between 2006 and 2015, according to a report by the Congressional Research Service.

The penalties for falling short can be costly. In addition to the reputation hit, a low rating generally prevents banks from pursuing mergers, which can be a big disadvantage for small and midsize lenders.

For instance, Mississippi-based BancorpSouth had to delay two mergers when its CRA rating was downgraded. Other bigger lenders including Wells Fargo, Fifth Third Bancorp and Regions Financial Corp. have faced restrictions on mergers or other expansion when their ratings were downgraded.

First Republic Bank, which caters to wealthier clients including those at Facebook's headquarters, has 14 branches that count for CRA credit as lower income. Three of those branches are in those popular neighborhoods that the newer census data indicate are no longer low- or moderate- income. On First Republic's most recent CRA exam in 2015, regulators gave it a "high satisfactory" rating for the portion of the test that includes examining branch locations.

The part of the CRA test looking at branch location examines census tracts, which typically have a few thousand people apiece. Each tract is typically sorted into one of four groups, based on the tract's median family income in relation to the broader metropolitan area's. Tracts in the two poorer groups are called low or moderate income, nicknamed "LMI."

Banks get better marks on the test for loans or branches that involve the two lower-income groupings.

In New York's tract 102, the bank regulators estimate that median family income is $45,019, or 62% of the $72,600 median for the New York City area. That number is pegged to 2010 census data.

But since then, the Census collected new data that boosted the income figure to $111,667, a bounce that's due in part to the tract's small sample size. In its most recent report, from 2015, the Census bureau couldn't find enough reliable data to give an income estimate.

Bank regulators that oversee CRA, which include the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, have continued to rely on the 2010 data, so the tract remained a lower-income one under the CRA test.

This year, bank regulators are starting to base their income designations on 2015 census data. The refreshed data, a portion of which was released by regulators earlier this year, will mean six of the 10 lower-income tracts with the most bank branches will no longer merit those designations.

As for Manhattan's tract 102, only about 30 households submitted data for the latest census survey. It isn't clear if they included the nine priests who live in the district at St. Patrick's Cathedral -- with incomes of around $30,000 apiece -- or any residents of Olympic Tower, where a doorman laughed at the question of whether the building had low-income residents.

(END) Dow Jones Newswires

May 18, 2017 08:14 ET (12:14 GMT)

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