Redlining is not dead. We know the story of where the term began, lenders would draw red circles or lines around certain neighborhoods and make it an unspoken policy not to lend to anyone within the circle or past a certain line on the map. These lines were usually drawn around struggling or distressed areas, and more often than not, a majority of the citizens in these neighborhoods were minorities.
Then there’s Reverse Redlining, these are instances where minorities and other protected classes are offered loans, but at a higher cost than those offered to non-minority applicants. This practice was chief among major factors that led to the 2008 financial crisis.
Whatever form redlining takes, it results in harm to groups of a protected class by either denying access to credit or offering credit at exploitative rates with a much greater chance of default.
HMDA, CRA, the Fair Housing Act and other regulations have provisions contained within them which prohibit this behavior. If a pattern or practice of redlining is found through the examination process, it could have a profound negative affect upon the offending financial institution.
It is a primary responsibility of the compliance officer to identify and report redlining risks before they become an issue.
The Cost of Non-Compliance
Over the years, compliance examinations have yielded less redlining enforcement than in other fair lending areas; however, there has been a recent uptick, and it’s an uptick more than anyone should be comfortable with. If an institution is found liable for redlining, remediation efforts, fines and penalties can be tremendous.
Monetary loss is not the only concern. Redlining can also lead to loss of integrity, reputation and, ultimately, customer abandonment. What happens if word gets out that Anybody’s Bank has had a redlining enforcement action levied against them? Will today’s consumer, deeply concerned with brand identity and community, initiate or maintain a relationship with a bank they don’t trust? For larger financial institutions, this could be a speedbump that heals over time. But for local, mid-size and smaller institutions, the reputational hit from a redlining accusation and enforcement can be devastating.
When working to identify and mitigate redlining risks, nothing is more valuable than routine monitoring. By taking quarterly or at least bi-annual looks at the geographic dispersion and penetration patterns of originations within the institutions loan portfolio, a determination can be made of where the institution is making its loans to help determine if there are areas where loan volume could be improved. More importantly, this will allow pro-active targeting of risk areas to try and improve performance and also allow time to determine if the methods employed are working before regulators start asking questions.
Get the right tools.
If your institution’s Compliance Management System (CMS) does not include automated data management and collection as well as a way to map the data, human interpretation and error can cloud the issue. In today’s connected world, compliance software is everywhere and can be found at all price points. Compliance personnel must make sure the systems used will provide reliable data that is easy to use and interpret.
For Instance, Marquis’ CenTrax NEXT software provides immediate access to all lending performance metrics through easy-to-read reports, maps, and exam tables. We also offer Compliance Professional Services, where our seasoned compliance experts conduct file reviews, risks assessments and more, ultimately delivering a comprehensive report you can take to your board with confidence.
With all this information at your fingertips, you’ll be able to easily identify redlining risks and tell if the steps taken to identify and mitigate the risk were effective. Collecting and organizing this data manually, or with a less robust system, can cost you in objectivity and accuracy.
Bottom line? Monitor your loan data at least twice a year, although quarterly is better.
Redlining is still an issue in the financial community. CRA, HMDA, and the Fair Housing Act are consistently evolving (think HMDA 2018) to aid in the prohibition of biased approaches to lending. Now, it’s up to compliance officers to identify redlining risks, report them, and be on the ball with helping to resolve any issues that may be discovered. Staying informed allows time to adjust and respond through peer analysis, mortgage credit demand analysis and other methods. Without intermittent monitoring and automated data collection and analysis, risks can go unnoticed right up to the last minute – making it too late to adjust or respond. With the right tools and consistent monitoring, your financial institution will be able to identify, respond to, and mitigate redlining risks.