Compliance Perspective: Branch Closings – Are You Considering These Risks?

Historically, bank branches have been an integral component of the retail-banking distribution model. However, given the rapid adoption of new technology in the financial services industry and changing customer preferences, many institutions are transitioning from the traditional physical branch model to more digitally focused channels. As a result of this shift, institutions are now forced to reexamine their physical presence within the communities they serve. There are many factors that need to be considered when evaluating whether to close or consolidate a branch. In addition to the economic and financial impact of closing a branch, it is vital that institutions also consider the legal and compliance risks related to Community Reinvestment Act (CRA) ratings and fair lending as part of a branch evaluation.

Institutions should evaluate the impact of closing a branch office in the communities it serves, particularly to low- and moderate-income geographies or individuals and minority communities. If the closure leaves fewer branches in low- or moderate-income areas or results in reaching fewer low- and moderate-income individuals, it could negatively impact the bank's CRA rating. Similarly, if branch closures disproportionately impact minority communities, a bank’s fair lending and redlining risk levels will be increased. To mitigate these risks, it’s important that banks have policies and procedures to evaluate the CRA and fair lending risk associated with any branch closure activity, including the closure of branch offices associated with mergers and acquisitions. Equally as important, institutions should document the analysis that supports their branch evaluations.

For additional information about CRA considerations for branch closings, please refer to Considerations for Branch Closings | St. Louis Fed (stlouisfed.org). 

If you have additional questions, please reach out to your Richmond Fed consumer central point of contact.