VIDEO: What is Redlining?
In this Compliance Clip (video), Adam provides a general overview of one of the hottest topics in fair lending: redlining. In doing so, Adam provides examples of allegations of redlining as well as specific areas the Department of Justice has said it will focus on when determining whether a lender has redlined a particular area. Plus, Adam changes the way he ends this Compliance Clip, based on a recommendation from his son - that you won’t want to miss.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to answer the question, what is redlining? Redlining is one of the hottest topics within the world of fair lending right now and it's part of regulatory compliance. As far as regulatory compliance goes, fair lending is one of the hottest topics, and in that, redlining seems to be one of the key focuses that regulators have been focusing on over the last several years, really the better part of the last decade. In fact, they seem to keep evolving over time and upping their expectations as it relates to redlining.
In the past, redlining was generally worried about for mainly mid-size and larger banks that were in more urban areas. However, it is my belief that smaller financial institutions, even some of the smallest financial institutions, really should be worrying about redlining and taking a look at redlining risk to make sure that your financial institution does not have issues that could be brought up as a concern by a regulator in an exam.
Redlining is a really big deal. The interesting thing about redlining is it actually originated back from the regulators, and that's a whole different story for another time. But let's talk about the definition of redlining. This is a good summary: redlining is an illegal practice in which lenders avoid providing services to individuals living in communities of color because of the race or national origin of the people who live in those communities. Now, that's one definition that the CFPB kind of came out with. I think you could argue that redlining is really a number of things, and it originated by drawing a line about an area and saying, “I don't wanna lend in this area.” And when that area has a large amount of protected class members, that becomes a problem. In today's day and age, lenders cannot choose an area not to lend in. They need to be lending in all areas of their community and of their assessment area to meet the needs of the community. So that's really what redlining is.
As far as what the regulators are concerned about, there are a lot of different examples of allegations of discrimination that the regulators bring up when they publicly cite violations of fair lending laws. Those allegations include a pretty large number of things, but I grabbed a couple from a recent Fair Lending Hot Topics program that I recorded, and I put those here on the slide so we can understand some examples of redlining allegations. Redlining allegations include things like avoiding locating branches in majority black or Hispanic communities. If your financial institution is adding branches and those branches are not in majority minority areas, that's a key term in fair lending, it’s majority minority, and the majority minority means that the majority of people living in this area, the census tract, is minority individuals. If you are avoiding locating branches in majority minority communities, but you're putting branches in majority majority communities, you could have a potential redlining problem. Also, if you're avoiding assigning loan officers to majority minority neighborhoods and communities, and branches that are located in those communities, that could be a problem for you as well, because that's a common allegation of discrimination that we have seen over the last few years. Also, your financial institutions should be monitoring your fair lending compliance, doing a regular review, doing some analyses to make sure that you do not have issues as it relates to fair lending. Finally, you need to make sure that your financial institution is not discouraging applicants or prospective applicants in majority minority neighborhoods. That's a big deal.
The regulators have gone a little bit further and they have said a couple of things. They've told us what they're looking for. Now, this is a really big topic and I have a Fair Lending Bootcamp in my store where I spend a total of, I think, six full recorded hours. So it's really a seven-hour program when you have breaks and could take an eight hour day to watch it. But we go over this in a lot more detail in the Fair Lending Bootcamp. But the regulators are looking for a couple of things, and again, this slide is taken from the Fair Lending Hot Topics program that I recently recorded. What they say, the Department of Justice actually came out recently and said that they're generally gonna focus on a few key areas when they're looking to see if a lender has redlined a specific area. They're gonna look at things like the financial institution, in this case, a bank's CRA assessment area. Where is a lender trying to serve? And if they're trying to serve this area, they're gonna be analyzing that.
They're also going to look at statistical analyses for disparities compared to similar banks. That's a key right there, comparing your lending to that of your peers. That's a real key on what the regulators are looking at, something you should proactively be looking at as well. Also, the regulators are looking at branch locations, whether they’re in majority majority areas or majority minority areas, and the placement of mortgage loan originators like we just saw. And the regulators are looking at your marketing and advertising to make sure you're not saying things or doing things that would discourage applicants. In fact, a few years ago we saw a radio show that was also re-released each day as a podcast from a lender in Chicago that was making fun of certain areas that happened to be majority minority areas, and the regulators came back and said that they were discouraging applicants from applying. And that was a major, major issue and they ended up with some big fines and penalties.
This is what the regulators are looking for when it comes to redlining. And that's really all I have for you for this Compliance Clip.