Recent enforcement actions brought by the Department of Justice (“DOJ”) and the Consumer Financial Protection Bureau (“CFPB”) are a reminder to lenders that regulators and law enforcement remain very concerned about redlining. In the past few years, as part of the DOJ’s Combatting Redlining Initiative, the DOJ and the CFPB have brough several actions enforcing the fair lending prohibition against redlining. We have heard from some banks that recent exams have focused heavily on fair lending and redlining concerns lately and that regulators have referred redlining findings to the DOJ for possible action.
The term “redlining” originates from the discriminatory practices lenders commonly engaged in prior to the implementation of fair lending laws. Lenders would draw “red lines” on maps of their lending area to designate majority-minority neighborhoods or areas in which they would not lend. While much fair lending analysis will focus on whether the lender’s decision is based on a prohibited characteristic about the applicant or borrower, redlining is a form of prohibited discrimination where the lender’s decision is based on a prohibited characteristic about the area in which the borrower lives or the collateral is located.
Redlining is a type of “disparate impact” discrimination – a facially neutral policy such as “the bank will not make loans secured by collateral in this area, regardless of the demographics of the individual borrower” that will reduce credit availability disproportionately among people who desire to purchase homes in that area. If the redlined area is demographically different than other areas in which the bank does lend, the overall effect of the policy is to reduce credit availability based on a prohibited factor. Because redlining was a common practice in the past and the fair lending laws were specifically intended to eliminate this practice, any type of geographically-based lending criteria are likely to invite regulatory scrutiny.
The DOJ’s enforcement actions demonstrate how redlining may occur without the actual red lines that lenders used in the past. Part of the DOJ’s theory of the case is that discouragement may be a type of redlining. For example, in the Citadel complaint, the DOJ asserts that Citadel’s marketing and branch locations were both heavily focused on non-minority areas in the greater Philadelphia area while failing to make similar efforts to provide services to minority communities in Philadelphia. In both the Citadel action and a similar action against a mortgage lender (Fairway), the DOJ focused heavily on the lenders’ failure to open offices or branches, as well as to advertise, in the majority-minority areas within their assessment areas. It is worth noting that the DOJ also alleged that Citadel did not have adequate fair lending training or internal risk assessments and that it also disregarded fair lending recommendations made by a third-party auditor.
These recent actions serve as a reminder that banks should use the internal fair lending tools available to them, such as risk assessments and internal audits, to avoid compliance issues, and also that serious failures to comply with fair lending requirements may be quite costly. As always, Compliance Alliance offers a variety of tools to assist members in developing rigorous fair lending programs and our Hotline team is available to answer any questions you may have.