Redlining & Branching Networks
In this Compliance Clip (video), Adam takes a look how a financial institution’s branching network could have an impact on redlining risk. The clip provides two visual maps as Adam reviews what redlining would look like visually, when it comes to a branching network.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about your branching network and how it can apply to redlining. In other words, where you place your branches can elevate your fair lending risk in relation to redlining. Somebody asked me a question on this and they asked how a branching network relates to redlining and what are some of the risks we should look for.
There's a couple of things I wanted to talk about in this quick Compliance Clip. First of all, your redlining risk can occur when your financial institution does not have branches in majority-minority census tracts, - census tracts that are comprised mostly of minority individuals like Hispanics or Latinos or African Americans or Native Americans. If your branching network is avoiding these areas, that could be problematic.
Also, what the Department of Justice has looked for in some of the recent cases, and there have been quite a few, is they're looking for large concentrations of branches just outside of these majority minority census tracts. We saw this in the late 90s, early 2000s with the case in Chicago where we were talking about dozens and dozens of branches that were just outside of these majority-minority census tracts. But what's interesting is more recently, we needed dozens and dozens and dozens of branches. We needed just a few for the Department of Justice to allege that there was redlining from their branching network. So there's been a few cases and the best way to explain this is to really just show you a couple of maps.
There's quite a few maps that I use when I do a full fair lending class. But here's one map. This was Kleinbank. It was a recent issue with the Department of Justice and instead of going into the details on this, I kind of want to point out how their branches are set up. Their branches are these dots on this map. And you can see the downtown areas of Minneapolis is really where the red area is. Kind of in the center of that little box that's not shaded purple. And then the bigger box that's not shaded purple right next to that is the downtown St. Paul area. Kind of the bottom part of that. And what you can see is their branching network.
What they kind of did is two things. Number one is they have this pretty big concentration. Especially when you look at it statistically. It just seems statistically out of the norm that they wouldn't go into this downtown area. But that's the first thing: they've got this concentration just outside of these majority minority census tracts. And then the second thing we see is they've kind of horseshoe-ed the downtown area. We've actually seen this happen several times where financial institutions horseshoe a downtown area. And usually in the downtown area, that's where your majority-minority census tracts are, and this becomes problematic.
Two things to watch for is to make sure that your census tracts that are majority-minority are not being avoided by your branching network and having large concentrations just outside of those areas. Secondly, they are not horseshoeing the downtown area, not placing any branches inside that downtown area.
Here's a second map. This is St. Louis. Kind of squiggly line on the far side of the map is the Mississippi River and the downtown area is this kind of red are. And what you can see is this bank, what happened was they had this was just a seven-branch community bank, just seven branches. And that was enough for the Department of justice to come in and say that they were putting their branches exclusively in white census tracts.
There were other allegations that we talk about in the Fair Lending classes that I teach, but that was something. So this is how it relates to your branching network.
The bottom line here is if you're considering placing more branches in your network, either through acquisition and merger or through just building new brick and mortar buildings and adding to your branching network, you need to make sure you're not arbitrarily avoiding the downtown areas or the majority-minority census tracts, because this has been a case where we've seen these problems several times over the years, especially when the Department of Justice gets involved in these redlining cases.
That's all I have for you today.