3 Ways to Mitigate Redlining Risk
Last month Consumer Financial Protection Bureau (CFPB) Acting Director Dave Uejio shared his vision for the bureau’s Supervision, Enforcement, Fair Lending (SEFL) division, emphasizing a focus on racial equity. In his statement, Uejio said that “fair lending enforcement is a top priority” but it will not be the only area of focus. He also plans for the CPFB to look “more broadly, beyond fair lending, to identify and root out unlawful conduct that disproportionately impacts communities of color and other vulnerable populations.”
Redlining is one such area that has received a lot of press over the last year. From town halls and academic studies to state investigations, there’s been no shortage of coverage. And according to publications like American Banker, it’s likely to receive attention from the CFPB in the months ahead.
Redlining takes its name from the practice of outlining high-risk lending areas, typically minority communities, in red on maps. The term dates to 1933 and a program designed under the New Deal. Facing a housing shortage in the U.S., the federal government began a program designed to increase — and segregate — America's housing. As a result, white, middle-class, lower-middle-class families were able to buy homes in the suburbs while African Americans and other people of color were left out of the new suburban communities — and pushed instead into urban housing projects. In 1934, the Federal Housing Administration (FHA) was established and further segregated efforts by refusing to insure a mortgage in or around African American neighborhoods.
Redlining was outlawed with the Fair Housing Act of 1968, but it still occurs today, often as a result of misguided marketing efforts.
For example, in July 2020 the CFPB filed a lawsuit against a Chicago mortgage company that allegedly failed to draw mortgage applications from African-American neighborhoods in its market. The CFPB used statistical analysis to make its case and show the mortgage company had “no legitimate, non-discriminatory reason to draw relatively few applications for mortgage loans for properties in these African-American areas.” The CFPB said disparaging comments about African American comments made by the mortgage company owner and loan staff discouraged African Americans from applying for mortgages.
More recently, the National Fair Housing Alliance (NFHA) and other fair housing organizations filed a suit against Redfin, an online real estate service. It claims that Redfin’s minimum home price policy discriminates against sellers and buyers of homes in communities of color, particularly in the metropolitan areas where they do business. As a result of the policy, NFHA says Redfin is far more likely to exclude non-White zip codes from its service area.
And just last week a report by New York’s Department of Financial Services found “a distinct lack of lending by mortgage lenders” in minority neighborhoods and populations in Buffalo.
To break the cycle of redlining, financial institutions need to understand their potential role in it. FI’s need to study fair lending enforcement actions, review their lending data, and take proactive actions to create fair and equitable marketing plans, products, and services. These need to be designed to appeal to and attract all consumers.
Let us look at each of these three mitigants.
As compliance professionals, we often hear our business partners and management brush off enforcement actions against others with comments like:
- “That is not our regulator.”
- “They are so much larger than us.”
- “We only market our brand.”
But looking at the last year of headline-making enforcement, size and regulator were not key factors. Complaints, lending data, and marketing efforts drove investigations.
The average marketing department isn’t trying to redline—but it can be an unintended consequence. Zip code targeting, online marketing, and social media feed algorithms are designed to drill down into customer wants and needs. However, as we learned from HUD and its 2019 case alleging that Facebook was engaged in digital redlining, not showing ads to users based on their interests, gender, search history, or zip code –even when not intended to be discriminatory—is still redlining.
Did your financial institution review its marketing practices and make any needed adjustments back when HUD brought this case against Facebook? If not, your institution is not acting proactively.
Marketing can cause other compliance headaches. Just think about the nine financial institutions, all different sizes, that were the subject of CFPB-issued consent orders in 2020 for deceptive advertising practices for VA-guaranteed mortgages. They contained false, misleading, and inaccurate statements. Lessons like these should guide FIs as they work to enhance their fair lending programs.
Fair Lending Data
I have been a broken record telling financial institutions that they need to know their data so they can tell their own stories. This is true for redlining as well as HMDA, consumer lending, small business lending (especially the Paycheck Protection Program), fee waivers, complaints, and other areas. Knowing what you have done allows your FI to recognize where it has been, so proactive changes can be made to get where you want to go.
If marketing or an industrious loan officer has created a REMA (Reasonably Expected Market Area) by design or by accident, it is time to own it! Banks may need to decide if it qualifies as a new assessment area for CRA purposes. A credit union needs to know if it will work in its footprint. A gap analysis or market study may be needed to understand the positives and negatives of moving into the area. Either way, it needs to be documented and reported on, and there must be a clear decision by management on how it will be addressed.
We are often asked; how do I even start to identify if I have redlining issues? Data analytics is top of mind. As an FI it is important you have reliable access to trusted data and leading-edge data solutions. Engaging with the right partners will allow you to respond to unfolding change quickly and efficiently.
Lending compliance is always evolving—and financial institutions need to be prepared to grow as well. The best way to accomplish this goal is with a strong lending compliance program that can quickly and thoroughly adapt and respond to any lending compliance risk. At a minimum, programs should have:
- Great leadership from the board and senior management.
- Mechanisms for managing the compliance risk.
- Three lines of defense that work together efficiently and collaboratively.
- Good lending data that goes beyond HMDA and CRA.
When we work proactively to understand how, what, and where we lend, we do more than tell our own stories. We help write a new, better one.