5 Redlining Risks Your Compliance Team Can't Afford to Ignore in 2017
In the last 18 months, the regulators have sent a clear signal: Redlining is a focal point. Redlining has been a compliance risk since the early days of banking, and it's not going anywhere - even as the political environment is changing. These are 5 Redlining risks your compliance team can't afford to ignore in 2017.
As compliance officers nationwide plan, budget and strategize for 2017, there are a few key risks that spring front-and-center. Redlining is one of them. Over the past 18-24 months, the regulators have sent a very clear signal that they're focused on Redlining risk. Just consider a few of the recent settlements:
- Sept. 2014: NY-basd Evans Bank settled with NY Attorney General for $875,000 in response to claims of redlining.
- Oct. 2014: HUD and Midland States Bancorp reached a $16M conciliation agreement related to redlining.
- May 2015: HUD and Associated Bank reached the largest-ever redlining settlement for a whopping $200M.
- Sept. 2015: A $27M redlining-related settlement was reached between Hudson City Savings Bank and the Department of Justice (DOJ). This is the largest redlining settlement with a mortgage company.
- March 2016: Kansas City Bank and HUD reached a $2.8M settlement to resolve allegations of redlining, sending a clear signal to community banks.
- Aug. 2016: BancorpSouth Bank and the CFPB reached a $10.6M redlining-related settlement, after using mystery shoppers to investigate claims of discrimination.
Here are the basic 5 redlining risks the regulators are consistently exploring, and that you should monitor:
1. Redlining Compliance Management System
As with other areas of consumer compliance, it's important to have set policies, procedures and practices to manage your redlining risk. Do you have a robust redlining compliance management program?
A strong redlining compliance management includes, but is not limited to, regular data analysis, monitoring, policies, and redlining-related complaint management, at a minimum.
Explore: Your policies, procedures, training, monitoring, risk assessments, disparity analysis within data, and management reporting/oversight.
2. Marketing Risk (Demand Side of Redlining Risk)
To avoid Redlining, you need to market to all communities and geographic areas that you serve. Do you have geographic areas with high minority or LMI census tracts that are being underserved, ignored or excluded?
For redlining, data analysis is essential for assessing your marketing risk, just as with broader Fair Lending compliance. If you aren't yet analyzing your data, there's no time to waste.
Explore: Analyze applications in minority census tracts, distribution of applications inside market areas, and application market share within the unique market areas. Be sure to review how your bank compares to peer and/or benchmark data.
[✮ Free Resource: 3 Simple Steps to Managing Your Redlining Risk!]
3. Origination or Underwriting Risk (Supply Side of Redlining Risk)
To avoid redlining, you need to ensure that you're doing business in every community that you serve. Do you have geographic areas with high minority or LMI census tracts that are being underserved, ignored or even excluded? Again, Redlining data analysis can help answer this question.
Explore: Analyze originations in minority census tracts, distribution of originations inside market areas, and origination market share within the unique market areas. Be sure to review how your bank compares to peer and/or benchmark data.
4. Reverse Redlining Risk (Targeting)
Reverse redlining is the practice of targeting individuals in LMI or high-minority census tracts for specific products that are often less desirable. Do you have higher-priced products that are concentrated in high-minority or LMI tracts?
Explore: Applications and originations in majority-minority census tracts and compare market share within the unique market areas. Again, review quantitative (stats) and qualitative (mapping) perspectives. Be sure to review how your bank compares to peer and/or benchmark data.
5. REMA Risk
REMA, or Reasonably Expected Market Area, is a term used to describe the analysis area used when analyzing Redlining risk. In your REMA, are there indications that you're intentionally excluding high-minority geographies? Consider policies, marketing efforts, and data analysis in particular.
Some other questions to consider are: where are your points of distribution (e.g., branches and brokers)? Examine each census tract; are your current assessment areas inclusive of entire political boundaries?
While your REMA, which is created by your examiner, is not the same as the CRA Assessment Area, the two are likely to be similar. To learn more about the distinction, check out this recent blog: Defining REMAs, Assessment Areas & More.
Explore: Annually review your assessment areas in comparison to the underlying Low- and Moderate-Income Census Tracts and Majority-Minority Census Tracts. Be sure to layer in your geocoded branches, ATMs, broker locations and your lending patterns.
In addition to the above elements, it is also common for the regulators to require the financial institution to review and/or expand their existing assessment area(s) and enhance elements of their policies and procedures.
TRUPOINT Viewpoint: Considering the significance of these settlements, the regulators continue to send a clear message about the need for Redlining risk management. As with all areas of Fair Lending and consumer protection compliance, data analysis is essential to understanding your risk.
We help lenders nationwide manage and reduce their Redlining risk. To see how, check out this video:
If that is intriguing to you, we encourage you to sign up for a quick, risk-free, no-obligation demo. Just click the button below to get started: