Keeping an Eye on the Red Line: Avoiding Fair Lending Regulations

Not long after the November election results became official, politicians, lobbyists and bankers began discussing the topic of bank regulatory reform. With a Republican in the White House, the Republican-controlled Congress vowed to push through its long-desired and promised reform of Dodd-Frank. While it is a decent bet some form of bank regulatory reform will emerge, it is unlikely reform will extend to the area of fair lending compliance. It seems most likely vigorous fair lending examination and enforcement are here to stay.

Each year, the Consumer Financial Protection Bureau prepares and issues a report specifically addressing its efforts in the area of fair lending supervision and enforcement. After touting its work from the previous year, CFPB specifically stated in its April 2017 Fair Lending Report that it will “continue to enforce existing fair lending laws at a steady and vigorous pace.” Furthermore, in a blog post from December 2016, Patrice Ficklin, director of CFPB’s Office of Fair Lending and Equal Opportunity, similarly indicated that the bureau’s work was far from over when it comes to stamping out lending discrimination.

The CFPB’s 2016 annual report identified three specific fair lending priorities for 2017, including redlining, mortgage and student loan servicing, and small business lending. While each of these priorities is important, redlining seems to be the hottest of the three in regulators’ eyes and deserves particular attention.

Redlining is a form of unlawful lending discrimination under the Equal Credit Opportunity Act (ECOA). It is defined as providing unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic, of the residents of a particular geographic area seeking credit. The unlawfulness of such practices is not new, but as with many consumer compliance issues, this one seems to go in and out of favor over time. It just so happens now it is back in favor.

The federal regulatory agencies take a risk-based approach to compliance examination, especially fair lending compliance examination. To determine the depth and breadth of the examination, the regulators evaluate and analyze the fair lending risk in the bank’s products and services. The results of this risk factor analysis affect the determination of whether, and to what extent, further examination is needed.

To identify redlining risk at a particular bank, the regulators may look at some or all of the following described risk factors:

CRA assessment area: The bank’s Community Reinvestment Act assessment area indicates where the bank expects to make loans. In assessing this risk factor, the examiner looks for exclusion (or non-inclusion) of geographic areas with high concentrations of minority race or ethnic residents.

Branch and loan production offices: Similar to the bank’s CRA assessment area, the location of the bank’s branches and loan production offices indicates from where it expects to attract loan customers. In assessing this risk factor, the regulators look for an unwarranted absence of locations in predominantly minority race or ethnic communities. Regulators look for so-called donut holes in the bank’s branch network?minority areas without a branch surrounded by majority areas containing branches.

Marketing and outreach: An effective marketing campaign attracts the customers the bank wishes to attract. In assessing the redlining risk attendant to the bank’s marketing efforts, the examiner looks to see whether the bank’s efforts expressly exclude, or will not include, racial and ethnic minority consumers. They consider to what zip codes or neighborhoods direct mail campaigns are sent and which real estate brokers are targeted for referral business. They also consider whether the bank makes affirmative efforts to reach out to racial and ethnic minority consumers as potential customers.

Complaints: Sometimes the most obvious indication of a problem is someone telling you there is a problem. Complaints about potential redlining may come directly to the bank by way of direct communication from an individual or advocacy group. But it is just as likely a complaint will be lodged on social media or in the press. In any case, the compliance examiner reviews complaints, including those received by regulatory authorities, in order to determine the existence and level of redlining risk.

Identifying and correcting unlawful redlining is a regulatory priority for 2017. Boards and senior management teams of banks of all sizes and geographies would be wise to redouble their efforts on making sure their bank’s policies, processes and procedures keep an eye out for that red line.