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Thursday, September 5, 2019

Redlining – Exam Preparation

QUESTION
We are a bank in California with 35 branches. I am the bank's Compliance Officer and General Counsel. Recently, we were notified by our regulator that we’ll be having a fair lending examination. I believe we are prepared. However, the fact is we have a lot of branches, and I am particularly concerned that we do not receive any allegations about redlining. We have a perfect examination history in such examinations; however, we were a much smaller back at the time of the last fair lending audit. So, I want to concentrate on redlining issues. What actions can we expect the examiners to take with respect to redlining?

ANSWER
Interestingly, you state your bank is located in California. In late July, the Department of Housing and Urban Development settled a complaint filed by the California Reinvestment Coalition against CIT Bank dba OneWest Bank, which resolved an allegation that OneWest Bank engaged in redlining.

The settlement called for investing a stated sum in a loan subsidy fund to increase credit opportunities for residents of majority-minority neighborhoods; devoting money toward advertising and community outreach; and providing a sum in grants for homebuyer education, credit counseling, community revitalization, and homeless programs. OneWest Bank committed to originating $100,000,000 in home purchase, home improvement, and home refinance loans to borrowers in majority-minority areas and to open a full-service branch serving the banking and credit needs of residents in a majority-minority and low- and moderate-income neighborhood. Of course, redlining allegations can adversely affect a bank’s reputation.

Let’s consider a viable definition of “redlining.” It is little known minutiae of history that the term “redlining” began years ago, way before map apps were available, when some lenders looked at paper maps, used a red marker to draw a circle around a neighborhood, and then avoided doing business in that circumscribed zone.

Here's a very good definition of “redlining”:

“Redlining is a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located. Redlining may violate both the FHAct and the ECOA.”

This is how redlining is defined by the federal banking agencies and the National Credit Union Administration, and if that definition is good enough for them, it’s good enough for me!

As a compliance officer, you must be aware of the actions that can be considered redlining – and that goes too for the senior lending management and the Board of Directors.

If you want to prepare for a redlining examination, I suggest the following six steps that examiners use. They have been developed over the years by the Interagency Fair Lending Examination Procedures and used in conducting a comparative analysis for redlining.

Step 1: Identify and delineate any areas within the institution’s Community Reinvestment Act (CRA) assessment area and reasonably expected market area for residential products that are of a racial or national origin minority character. (By the way, credit unions will not have a CRA assessment, but for community credit unions that have a specific geographic area designated as their field of membership, NCUA examiners will likely start with that.)

Step 2: Determine whether any minority area identified in Step 1 is excluded, underserved, selectively excluded from marketing efforts, or otherwise treated less favorably in any way by the institution. Examiners begin with the risk factors identified during the scoping process. This step will verify and measure the extent to which Home Mortgage Disclosure Act (HMDA) data show the minority areas identified in Step 1 to be underserved and/or how the institution’s explicit policies treat them less favorably.

Step 3: Identify and delineate any areas within the institution’s CRA assessment area and reasonably expected market area for residential products that are nonminority in character and that the institution appears to treat more favorably.

Step 4: Identify the location of any minority areas located just outside of the institution’s CRA assessment area, market area, or lending areas as stated in its policies for residential products, such that the institution may be purposely avoiding such areas. If there are minority areas that the institution excluded from the assessment area improperly, consider whether they ought to be included in the redlining analysis. Analyze the institution’s reasonably expected market area in the same manner.

Step 5: Obtain the institution’s explanation for the apparent difference in treatment between the areas and evaluate whether it is credible and reasonable. According to the examination procedures, this step completes the comparative analysis by soliciting from the institution any additional information not yet considered by the examiners that might show that there is a non-discriminatory explanation for the apparent disparate treatment based on race or ethnicity.

Step 6: Obtain and evaluate specific types of other information that may support or contradict a finding of redlining. (Actually, this step is a catch-all step that advises examiners that as a legal matter, discriminatory intent can be inferred simply from the lack of a legitimate explanation for clearly less favorable treatment of racial or national origin minorities.) If the institution’s explanations do not adequately account for a documented difference in treatment, the examiners should consider additional information that might support or contradict the interpretation that the difference in treatment constituted redlining.

Obviously, whatever the examiners are going to look at, you had better look at first!

You might be interested in what examiners consider during their comparative file reviews, third-party analysis, and the institution’s marketing plans.

So, here are a few items that the examiners would be expected to evaluate.

Comparative file reviews usually include analyses, such as:

·       Were any denials of fully qualified applicants from the suspected redlining area? If so, that may support the view that the institution was avoiding doing business in the area.

·       Does the file review identify instances of illegal disparate treatment against applicants of the same race or national origin as in the suspected redlining area? If so, that may support the view that the institution was avoiding doing business with applicants of that group, such as the residents of the suspected redlining area. Learn whether any such identified victims applied for transactions in the suspected redlining area.

·       If there are instances of either of the above, identify denied nonminority residents, if any, of the suspected redlining area and review their application files. Do they appear to have been treated in an irregular or less favorable way? If so, that may support the view that the character of the area rather than of the applicants themselves appears to have influenced the credit decisions.

·       Do withdrawn and incomplete applications for the suspected redlining area show a reliable indication that the institution discouraged those applicants from applying? If so, that may support the view that the institution was avoiding conducting business in the area and may constitute evidence of a violation (i.e., Regulation B, 202.4(b).

Third-party analysis usually includes:

·       Interviewing third parties, such as housing or credit counselors, home improvement contractors, or real estate and mortgage brokers, who may have extensive experience dealing with credit applicants from the suspected redlined area.

Market plans evaluations often include:

·       Reviewing the marketing plans and material to determine if there are specific exclusions of the suspected redlining area from the institution’s marketing of residential loan products, which would support the view that the institution did not want to do business in the area.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group