Redlining enforcement has been on the rise since the U.S. Justice Department (DOJ) launched the Combatting Redlining Initiative in October 2021. So far it has resulted in 6 redlining cases and $84 million in settlements – and redlining enforcement is likely to continue.
“The Justice Department will continue to build on our efforts to vigorously enforce federal fair lending laws and work to ensure that financial institutions provide equal opportunity for every American to obtain credit,” Attorney General Merrick B. Garland said in a January 2023 press.
The DOJ and Consumer Financial Protection Bureau (CFPB) made history last year with a joint redlining suit against a mortgage company that was settled for $24.4 million – the DOJ’s second largest redlining settlement and its first against a non-bank.
DOJ redlining enforcement has already cost banks $40 million.
In January, a California bank settled allegations of redlining for $31 million, the largest-ever bank redlining settlement. In it, the DOJ alleged the bank avoided making mortgage loans in majority-Black and Hispanic neighborhoods in Los Angeles, with other banks in their market receiving six times more mortgage applications from these neighborhoods. Of the 11 branches it opened or acquired in Los Angeles over the past 20 years, just one was in a majority minority community with the other 10 in majority white neighborhoods. No employees were tasked with promoting mortgage loans at the branch added in the majority-minority community.
The DOJ also criticized the bank’s fair lending policies procedures and oversight. It says the bank “failed to act on internal reports indicating fair lending and redlining risk” and “did not develop or offer any affordable loan products” even though it could have.
Related: 7 Ways to Analyze Your Data for Redlining Compliance Risk (ncontracts.com)
To resolve the suit, the bank agreed to open a branch in a majority-Black and Hispanic neighborhood and employ at least four dedicated mortgage loan officers in these neighborhoods. It’s also investing nearly $30 million in a loan subsidy fund and additional money into advertising, financial education, and community partnerships related to residential mortgage lending. It will also conduct a market study to identify credit needs in majority-minority neighborhoods.
Similar allegations and plans for financial restitution are present in other recent settlements, including an Ohio bank that settled allegations of redlining for $9 million in February 2023 and a New Jersey bank for $12 million in 2022. (Now community groups are using the suit to lobby the Federal Reserve Bank of New York to add stipulations to a proposed merger with another bank that would require additional investment and oversight into the bank’s Community Reinvestment Act (CRA) activities.)
Most institutions don’t deliberately redline. It can happen unintentionally due to underwriting standards, marketing standards, product offerings, concentration of branches or even loan officer focus.
A key part of preventing redlining is the ability to identify potential problems. That requires data analysis so you fully understand where your institution is engaging in lending activities.
If an internal review reveals that your financial institution has significantly fewer applications and approvals in majority minority census tracts (MMCT) than your peers, it’s important to take action to increase applications. How?
Efforts to improve lending in underserved communities takes time. Regulators will expect you to identify areas where you’re underperforming and have an improvement plan. That includes monitoring your progress.
Managing your redlining compliance absolutely requires analyzing your data for risk exposure and examiners usually will assess redlining risk during a Fair Lending or CRA exam too. A good CRA program and Fair Lending program proactively analyzes data and looks for redlining and implements remediation plans before examiners come.
Once plans are implemented, it’s important to track the results. Are applications increasing in the areas you’re targeting? Are approval rates becoming more in line with peers? This can help show you if your efforts are working or if you need to try other approaches.
Even if you don’t have issues with redlining, it’s important to continue monitoring your program for changes. Proactively analyzing your data helps ensure you aren’t part of the redlining problem.
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