Those of us who have been in banking for a few decades remember some of the earlier redlining cases of the 1990s, which until recently seemed to be a thing of the past, a dark point in our history. But the recent uptick in enforcement activity involving redlining should cause us to stop and take another look at the geographies and communities from which we take applications and in which we originate loans.
Redlining is a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristics of the residents of the area in which the applicant or potential applicant resides or will reside or in which the residential property to be mortgaged is located. Redlining may violate both the Fair Housing Act and the Equal Credit Opportunity Act and additionally impose Community Reinvestment Act risk.
Here are a few questions to ask when considering your institution’s redlining risk.
- What is the demographic make-up of the communities surrounding your branch locations?
- Are you in or near a geography that contains high minority census tracts, but all of your branch locations are in majority white census tracts?
- Do the majority of your loans or applications come from Metropolitan Statistical Areas or counties that have high (>50%) minority census tracts?
- Do you have applications and loans within those high minority tracts?
- Is your percent of applications and originations within those minority tracts similar to other comparable lenders?
- If not, have you addressed the reasons you are not receiving the same level of volume in these census tracts as other lenders?
- Do you hire lenders that have experience lending in or ties to high minority areas in your market?
- Do you have applications in high minority tracts but not originations? Do you have a greater percentage of denials related to inadequate collateral in these tracts or more higher-priced or high-cost mortgage loans in those tracts?
One theme from recent enforcement actions includes the practice of placing branches in the outer majority white suburbs circling the urban center of the city and forming a circle or a horseshoe, thereby excluding the city’s core from the Community Reinvestment Act assessment area. If a financial institution has multiple branch locations in majority white areas but no branches in a nearby city core made up of high minority census tracts, regulators view this as intentional. And while outreach is often the first step when geographical gaps in lending are identified, recent enforcement actions have pointed out that failing to monitor the effectiveness of outreach focused on underserved areas and failing to market the types of products that may better serve these communities are considered redlining. Other trends noted were failure to hire loan officers trained to serve or with ties to the demographics within high minority census tracts in your reasonably expected market area. Another cause of enforcement in recent years has been allowing regional leaders to identify their region’s assessment area without any oversight of the make-up of the overall assessment area, resulting in pockets of underserved high minority tracts located between the various regional assessment areas.
So if your redlining assessment has not gone beyond drawing a circle around each of your branches to ensure you haven’t left out any nearby minority census tracts, you may want to review recent redlining cases and answer the questions above to determine whether you have any additional risk. While you may serve all nearby or adjacent census tracts, you may not be adequately serving minority areas within the geographies in which you make the majority of your loans. Consider conducting or outsourcing a redlining analysis as a first step in determining your risk level. This allows you to take control of your redlining risk and put the appropriate action plans in place prior to someone else bringing this to your attention.