The Justice Department (DOJ) continues to fulfill Attorney General Merrick Garland's 2021 promise that his department would “spare no resources” in upholding fair lending laws – this time with a $9 million redlining settlement with a $7 billion-asset Rhode Island bank.
Over the past two years, the DOJ’s Combatting Redlining Initiative has secured $98 million in agreements with banks from Los Angeles to Newark, N.J. In this case, the DOJ alleges that between 2016 and at least 2021 the bank:
Like the New Jersey bank that settled a $13 million redlining case brought by the DOJ last September, the Rhode Island bank was aware of its fair lending violations.
As early as 2011, internal and external compliance risk reports cautioned that the number of mortgage applications and originations in majority-minority areas was too low. Risk assessments recommended that the bank “develop a comprehensive marketing campaign to encourage Black and Hispanic consumers” to apply for mortgage loans.
Despite this, the DOJ says bank continued with a statewide marketing strategy emphasizing its brand as a full-service community bank. It did not address the disparate impact of its mortgage lending by focusing attention on majority-Black or Hispanic neighborhoods in its assessment area.
Examiners evaluate financial institutions’ fair lending compliance based on their reasonably expected market area or “REMA.” The REMA is used to evaluate lending and level of services in majority-minority census tracts for potential redlining. It's not defined by Fair Lending laws, and not selected by the institution. It may or may not be the same as the CRA assessment area or trade area. A few factors that may determine the REMA are:
Examiners measure expected loan applications and originations for traditionally underserved populations compared to the reported volume of lending services in majority-minority census tracts within an institution’s REMA or assessment area.
For reference, the DOJ states that 16 percent of the residential census tracts in the State of Rhode Island are majority-Black and Hispanic. Yet for the 10,505 HMDA-reportable mortgages the bank underwrote from 2016 through 2021, only 255 (2.4%) came from residents in the institution’s majority-Black and Hispanic census tracts.
The bank significantly underperformed its peer lenders – defined by the DOJ as “similarly-situated financial institutions that received between 50 and 200% of the Bank’s annual volume of home mortgage loan applications.” The bank’s peer lenders generated 9.5% of mortgage originations in majority-Black and Hispanic neighborhoods during the same five-year period.
The Department of Justice argued that this disparity was statistically significant – meaning that it was likely not the result of chance – given the difference between the percentage of mortgages underwritten in majority-minority areas by the Rhode Island bank compared to its peer lenders.
Most financial institutions do not deliberately engage in racial redlining. Unintentional redlining typically occurs because FIs offer too many exceptions or fail to review their marketing materials and expand outreach to communities within their assessment area.
But regulators and the DOJ don’t care about a financial institution’s intentions. They care about its impact. To know if your FI engages in unintentional redlining, you must employ a team of statisticians and analysts or invest in a lending compliance software solution.
To avoid redlining, regulators want financial institutions to possess a robust compliance program that:
Related: 7 Ways to Analyze Your Data for Redlining Compliance Risk
The aforementioned bank failed in all the above, according to the DOJ, paying a steep price in its settlement.
Under the proposed consent order, the bank has agreed to:
The bank also agreed to finalize a community credit needs assessment, report on its fair lending program, and train staff to understand its obligations under this consent order.
The $9-million figure in the headline undersells the total amount the bank will pay in its settlement. In addition to the penalties listed above, it must cover the cost of opening new branches in majority-Black and Hispanic neighborhoods and hiring and training new personnel.
Many financial institutions believe that racial redlining enforcement only happens to bad actors. After all, the bank knew it had a problem in 2011 and chose to do nothing about it.
The truth is that regulators want every institution to have a strong fair lending compliance program. Short of legal action from the DOJ, regulators won’t hesitate to warn FIs about their fair lending issues. Once you receive a warning, your institution will be subject to increased scrutiny and pressure. You may need to hire costly outside consultants, and your bank board and CEO will be less than pleased by this turn of events.
Even if you avoid paying a settlement, accusations of redlining might catch the media's attention. Can you afford the reputational risk of your community viewing your financial institution as discriminatory?
Another common misconception is that regulators only go after large institutions. “We’re too small” is a common refrain of FIs that don’t want to manage their compliance risk. Just tell that to the Oklahoma bank with $384 million in assets under management, that recently found themselves on the wrong side of a $1.15 million redlining settlement from the DOJ.
Unintentional redlining results from underwriting standards, marketing campaigns, branch location and concentration, and the motivation and training of loan officers. Preventing redlining requires extensive data analysis to pinpoint problem areas and ensure that your institution has the right mix of loan applications and originations from majority-minority census tracts in your CRA assessment area.
Understand Your Fair Lending Risk