Under the Biden administration, there has been a renewed focus on fair lending issues, with particular attention to concepts of equity and equality in banking and combatting redlining. Regulators are looking at a bank’s Reasonably Expected Market Area (REMA) – i.e., where a bank could be reasonably be expected to have marketed and provided credit – rather than just the bank’s assessment area. Regulators will evaluate HMDA data on applications received and lending in majority-minority census tracts (MMCTs) as compared to other lenders, and disproportionately lower levels will raise concerns. Regulators will rely on statistical analyses of peer performance, as well as marketing and outreach efforts, to support inference of disparate treatment on the basis of race.
While neither the Equal Credit Opportunity Act (ECOA) nor the Fair Housing Act (FHA) use or define the term “redlining,” courts and agencies have generally interpreted redlining to include the following:
- Having different marketing or lending practices for certain geographic areas, compared with others, when the purpose or effect of such differences would be to discriminate on a prohibited basis;
- Treating applicants for credit differently on the basis of differences in the racial or ethnic composition of their respective neighborhoods;
- The avoidance of segments of the market area in providing products and services; and
- Reverse redlining involving a high percentage of loans with less advantageous features in MMCTs.
Recent settlements have highlighted practices in which institutions appeared to avoid predominantly Black and Hispanic neighborhoods, concentrated branches in majority-White neighborhoods, and avoided outreach and marketing to predominantly Black and Hispanic neighborhoods. Red flags for elevated redlining risk specifically for marketing include things like limiting marketing to current customers, limiting to zip codes not having MMCTs, and limiting diversity people featured in marketing materials. To prepare for the increased scrutiny on redlining issues you’ll want to take the following proactive steps:
- Assess the shape of your assessment area to make sure you’re not excluding majority-minority neighborhoods;
- Review the locations of your branches and loan officers, and avoid only taking a part of a county, rather than the entire county;
- Look into marketing and outreach efforts to reach majority-minority areas;
- Evaluate your specific policies and training;
- Compare your performance to that of your peers, understanding that in big cities you could be compared to any lender in the entire metropolitan statistical area (MSA);
- Periodically monitor data for potential fair lending and redlining risks, rather than wait for the next compliance examination;
- Include data comparisons to benchmarks (census and peer group), in addition to a more traditional review of application and origination numbers;
- Be prepared to proactively demonstrate which entities should be considered peers and how the institution’s data compares with those entities;
- Proactively engage in outreach and marketing that incorporates the monitoring results and is tailored to reach all an institution’s assessment area and REMA; and
- Affirmative marketing initiatives specific to MMCTs, with particular focus on marketing and outreach in areas that could close any MMCT tract holes.
There are many ways in which banks could evaluate or update their approach to combating redlining, and because of that you may have questions about policies, procedures, or practices, and we’re here to assist. Reach out to us on the hotline with any questions you might have about redlining or related topics and we’ll help you improve your processes.