With respect to fair lending scrutiny, redlining remains a critical concern for financial institutions. While data analysis is essential, a comprehensive understanding of redlining risk requires banks to look beyond the numbers. “Telling your bank’s story” involves proactively assessing policies, practices, and community context to ensure effective management of fair lending risk.
Redlining, a form of illegal disparate treatment, occurs when a financial institution provides unequal access to credit or unequal terms of credit based on prohibited characteristics such as race or national origin.
While data analysis is most often the focal point of regulatory actions against institutions and plays a crucial role in identifying potential redlining, banks must also focus on several other factors to effectively analyze and mitigate their risk. It is important for banks to “tell their story” and proactively address potential weaknesses and concerns.
Understanding Redlining
Redlining involves discriminatory practices that affect access to credit and services:
- Exclusion: Refusing to extend credit in certain areas.
- Targeting: Offering less advantageous products or services to specific borrowers or areas based on prohibited characteristics. This is also known as reverse redlining.
- Restrictive Lending: Making loans in certain areas but at a restricted level or on less favorable terms compared to other areas.
- Marketing Exclusion: Omitting or excluding certain areas from marketing efforts for residential loans or customer solicitation.
Key Areas of Focus for Banks
- Policies and Statements: Banks should carefully review their written and oral policies for any language that could suggest a link between the racial or national origin character of an area and access to credit. This includes avoiding geographical terms that connote a specific racial or national origin character.
- Comparative Analysis: Banks should proactively compare their treatment of areas with contrasting racial or national origin demographics.
- Identify areas within the bank’s CRA assessment area and market area with a racial or national origin minority character.
- Determine if any minority areas are excluded, under served, or selectively excluded from marketing efforts.
- Identify non-minority areas that appear to be treated more favorably.
- Consider minority areas located just outside the bank’s CRA assessment area and market area to ensure they are not being purposely avoided.
- Documentation of Demand for Credit: Banks should document or estimate the demand for credit within minority areas, considering factors such as demographics, home-ownership rates, median house values, and the number of small businesses.
- Explanations for Differences in Treatment: Banks must be prepared to explain any apparent differences in the treatment of minority and non-minority areas. These explanations should be credible and reasonable, supported by documented policies and specific conditions.
- It is important to evaluate whether the conditions used to justify more or less favorable treatment in certain areas also exist in areas that received different treatment.
- Review of CRA Lending Test Analyses: Banks should review prior CRA lending test analyses to identify any previously identified under-served areas or geographical disparities in lending.
- Marketing Practices: Banks should evaluate their marketing practices to ensure that minority areas are not excluded from marketing efforts for residential loan products. Disparities in marketing between racially different areas can indicate a preference for one area over another.
- Peer Performance: While an institution cannot justify its failure to serve an area by citing other institutions’ failures, a bank’s inactivity in an area where its competitors are active may suggest an intent to avoid doing business in that area.
- Institutional Record: Banks should maintain information about their overall record of serving or attempting to serve the racial or national origin minority group identified with the suspected redlining area.
- Third-Party Interviews: Banks should be aware that examiners may interview third parties, such as housing counselors and real estate brokers, to gather information about the bank’s treatment of applicants from suspected redlined areas.
By focusing on these factors, banks can gain a more comprehensive understanding of their redlining risk and take proactive steps to ensure fair and equal access to credit for all communities. It’s essential to “tell your bank’s story” by providing context and explanations for lending patterns, especially in areas with low loan penetration due to factors like industrial or agricultural zoning.
