All year, Redlining risk has dominated headlines and been touted as a regulatory priority. That was no different in this year's annual Interagency Fair Lending Hot Topics Webinar. Redlining risk captured more than half of the time of the webinar. Here are some of the key takeaways.
Earlier this week, the regulators presented the 2016 Interagency Fair Lending Hot Topics Webinar, and Redlining dominated the presentations. This has been a trend all year, from the ABA Regulatory Compliance Conference and the MBA Regulatory Compliance Conference to press releases and other guidance.
In the webinar, the Consumer Financial Protection Bureau (CFPB), Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Civil Rights Division of the U.S. Department of Justice (DOJ) all weighed in on Redlining.
Below are some of the key Redlining-related takeaways from the 2016 Interagency Fair Lending Hot Topics Webinar.
1. You can't truly understand your Redlining risk without data analysis.
Redlining risk is a major hot topic, and one you need to take seriously. If you aren't analyzing your Redlining risk, now is the time to consider it - before it's too late.
Most institutions have good intentions, and many don't think that they have Redlining risk. However, just like with other areas of Fair Lending compliance, you can still get pinched for unintentionally Redlining, by having policies, practices and procedures that lead to different communities getting access to different products and services. This is called disparate impact.
In a nutshell, that's why analysis is so important: it will identify any disparities that may give the regulators the impression that you're Redlining or Reverse Redlining.
If those disparities aren't justifiable or explainable, you have the opportunity to adjust your policies, procedures, and programs in order to mitigate that Redlining risk before the regulators arrive.
Even you have strong policies and procedures, it's essential to analyze your data so that you can assess how well they're working to prevent Redlining. If you analyze your data and you have no Redlining risk, you'll know that your policies and procedures are working!
2. The CFPB is focusing on mortgage lending in general, and Redlining in particular.
The Deputy Fair Lending Director of the Office of Fair Lending and Equal Opportunity at the Consumer Protection Bureau discussed the CFPB's priorities in 2016-2017. The top priorities include:
- Mortgage Lending, with a focus on Redlining;
- Auto Lending, both direct and indirect; and
- Credit card lending.
(In addition, they outlined some of the new HMDA data fields that will be required, and what it might mean for you. We'll touch on that more in an upcoming blog.)
3. Redlining is still a major regulatory priority for a reason.
Redlining has been a regulatory focus for a while, and it's been illegal since the 60s. That has led some to wonder why Redlining is still such a focal point. During this Interagency Fair Lending Hot Topics webinar, the regulators answered just this question.
According to the DOJ, it remains a priority because "it’s a persistent problem despite years of enforcement action, and the significant impact on minority communities."
For example, in August, regulators fined a bank $10.6M for illegally Redlining. They discovered that the institution was Redlining by using mystery shoppers.
4. There are at least 7 key areas the examiners will consider when evaluating your Redlining risk.
The FRB has made 7 referrals to the DOJ; two were Redlining-related, one was pricing-related, and four were related to spousal signatures. When examiners are reviewing an institution for Redlining risk, they will consider at least the following 7 key areas, though likely a few more, through both qualitative and quantitative assessments:
- CRA assessment area and REMA (Reasonably Expected Market Area);
- Branch network, including any changes in branch locations or services;
- Marketing & outreach;
- Lending disparities;
- Overt statements of discrimination;
- Complaints; and
- Previous findings.
[Free eBrief: 3 Steps to Anayzing Your Redlining Risk]
5. Your REMA is essential to your Redlining compliance.
As you're evaluating your Fair Lending and Redlining risk, you need to be aware of your REMA. What's a REMA? A Reasonably Expected Market Area.
According to the FFIEC's Interagency Fair Lending Examination Procedures, the REMA is the area within which "the institution actually marketing and provided credit and where it could reasonably be expected to have marketed and provided credit."
The REMA is used to evaluate your Redlining risk, and data analysis will determine whether your bank is providing equal access to credit in your REMA. According to the FDIC, that analysis will consider whether you are:
- Extending or not extending credit in certain areas;
- Targeting certain areas with less advantageous products;
- Offering different loans to different areas; and/or
- Not marketing residential loans to certain areas.
You need to analyze your loan and deposit activity for Redlining risk. When you do that, it's essential that you first determine your REMA. Here's how the REMA is determined:
- Discussions with organization;
- Branch network;
- Marketing efforts (including print advertising, any call campaigns, and direct mailings);
- Brokers and Realtor, and the areas they serve;
- Location of the bank's loan applications, originations and deposit customers; and
- Significant barriers to lending, such as geographic barriers, limited housing stock and/or low population levels.
Please note that your REMA may be different from your CRA assessment area.
These days, financial institutions can't afford to neglect their potential Redlining risk exposure. However, sometimes it can be tough to know where to start.
TRUPOINT can help. We have free resources, like this eBrief that explains the 3 Steps to Understanding Your Redlining Risk, and a brand-new white paper that focuses exclusively on managing your Redlining Risk. We also offer a Redlining Analysis software that will analyze your Redlining risk and identify any disparities. If you'd like a risk-free demo to see what it's all about, just sign up here.
As always, we wish you the best of luck in achieving your compliance goals! Let us know how we can help.
- 2016 Interagency Fair Lending Hot Topics Webinar
- Regulators Use Mystery Shoppers for $10.6M Fair Lending & Redlining Settlement
- $2.8M Redlining Settlement Impacts Community Banks
- Analyze Your Redlining Risk in 3 Simple Steps