The Redlining Wake-Up Call: Lessons for Mortgage Lenders

From supervisory priorities and speeches to enforcement actions, regulatory agencies are cracking down on fair lending enforcement in 2024. That spells bad news for mortgage lenders failing to address redlining risk proactively. 

The Department of Justice (DOJ) recently commemorated the anniversary of the Combatting Redlining Initiative, which has seen 15 settlements totaling more than $150 million since 2021. Earlier this year, the Consumer Financial Protection Bureau (CFPB) revealed that the DOJ has seen a 175% increase in Equal Credit Opportunity Act (ECOA) violation referrals since 2020. And you guessed it: redlining was mentioned in several of these referrals.  

With regulatory agencies actively referring lenders with a pattern of lending discrimination (and even those only suspected of ECOA violations), the heat is on mortgage lenders to act or face the consequences on a federal and state level. For financial institutions like the now-defunct $6 billion-asset Republic First Bank, a history of redlining and discrimination violations ultimately forced the institution to shut down its residential mortgage lending business, leading to the bank’s failure. 

What does this mean for mortgage lenders in 2025 and beyond? What can financial institutions (FIs) do to take control of redlining risk? Let’s explore some of the latest redlining cases to see what NOT to do.  

Related: 8 Red Flags Indicating Potential Fair Lending Risk 

The consequences of redlining explored

Case Study 1: A Birmingham mortgage lender to pay $10M to address redlining damages 

In a case brought jointly by the Justice Department and the CFPB under The Combating Redlining Initiative, a mortgage company agreed to pay nearly $10 million to address allegations of redlining in majority-Black neighborhoods in and around Birmingham, Alabama. 

The mortgage company’s data revealed that it failed to serve majority-Black neighborhoods from 2017 until at least October 2022. Before that date, the mortgage lender took no meaningful actions to address the redlining risk, even though its data revealed that changes needed to be made.  

For seven years, the bank operated three retail loan offices and three loan production desks within real estate offices in the Birmingham Metropolitan Statistical Area (MSA), all of which were in majority-White areas. Moreover, most of its referrals were in majority-White areas, it directed its marketing primarily to majority-White areas, and it needed to train or incentivize its loan officers to serve majority-Black areas better.  

Takeaway: The mortgage company had data indicating its failure to serve majority-Black neighborhoods but took no meaningful action for years, underscoring that awareness alone is insufficient without proactive measures to rectify the issues at hand.  

The cost of redlining  

The proposed consent order comes with a steep price tag. The lender is providing $7 million for a loan subsidy program, investing at least $1 million in opening or acquiring new loan production offices or full-service retail offices in majority-Black neighborhoods in Birmingham, and paying a $1.9 million penalty—totaling nearly $10 million. 

Related: Changing Census Tracts and the Impact on Your Fair Lending Analysis 

Case Study 2: New Jersey Attorney General and Division on Civil Rights issue redlining report on defunct bank

A new report from the New Jersey Attorney General and the Division on Civil Rights (DCR) revealed the findings of a multi-year investigation into allegations of mortgage redlining and discrimination by the aforementioned Republic First Bank. The bank, which was closed by regulators earlier this year, “engaged in a pattern and practice of redlining Black, Hispanic, and Asian communities in New Jersey in violation of the New Jersey Law Against Discrimination (LAD).” 

Republic knew it faced redlining risk in its lending and didn’t actively address the issue. Its branches and mortgage offices were located only in predominantly White areas; none were in majority-Black, Hispanic, or Asian neighborhoods. The FI also made more underwriting policies for White and high-income borrowers and didn’t engage in meaningful advertising in communities of color. 

Takeaway: Despite being aware of redlining risks, Republic First Bank failed to act, a similarity it shares with the FIs highlighted in these redlining case studies. This oversight highlights the critical need for organizations to recognize these issues and actively work to address them in their business strategies.  

The cost of redlining

While Republic is no longer active, the state has filed a claim with the FDIC, the receiver for the bank, intending to “seek recovery from the FDIC for New Jerseyans harmed by Republic’s redlining practices.” A bank that acquired Republic’s assets was also named in the report and encouraged to address or mitigate risks associated with the acquisition.  

Related: Mapping and Fair Lending: How the Agencies Use Your HMDA Data 

Case Study 3: DOJ announces historic redlining settlement against credit union 

It’s not just banks or big mortgage lenders that can get in redlining risk trouble. In a landmark agreement, a credit union in Pennsylvania agreed to invest more than $6 million in initiatives to address redlining risk. 

In 2009, the credit union planned to open three branches in Philadelphia County and implement a community outreach plan for underserved residents, but these plans were not executed. Instead of serving underserved areas, the credit union expanded into predominantly White neighborhoods. Later, in 2016, a third-party assessment revealed the credit union had significantly fewer applications from minority borrowers compared to its peers. However, the credit union did not take any action to address the findings from the assessment. 

The DOJ stated that these practices led to unequal access to home loans based on race, color, or national origin, with no legitimate business justification for them. 

Takeaway: This situation highlights the importance of prioritizing equitable lending and inclusivity. It's not just the right thing for FIs to do – it's a legal obligation.  

The consequences of redlining

The credit union has agreed to invest about $6.5 million in creating more credit opportunities for majority-Black and Hispanic neighborhoods in Philadelphia. This includes a $6 million loan subsidy fund for mortgage, home improvement, and refinance loans, $250,000 on community partnerships, and $270,000 on advertising and education. The credit union must also open three branches and hire a community lending officer to oversee loan development in these communities. 

Actionable insights for mortgage lenders

As you’ve probably noticed, these mortgage lenders made similar mistakes that could have been avoided. Use the dos and don’ts below as you reexamine your FI’s fair lending risk approach.  

Analyze your data for fair lending risk

The best way to identify fair lending risk is to analyze your data. Comparative statistical analysis of loan data can pinpoint disparities and the loans causing the problem so you can understand if it’s actually a problem or if there is a justifiable business reason for the disparity. You may need to seek the help of a third-party provider when analyzing and interpreting data for redlining, marketing issues, underwriting, and price steering.  

Related: Is Your FI Complying with Fair Lending Laws? - Leverage Analytics 

Implement your data findings

One of the biggest takeaways from the aforementioned redlining cases is that data means nothing if implemented incorrectly. If your organization’s data is sitting static, it can’t be used to identify potential or emerging areas of risk. When it comes time for internal or external audits, your team may scramble to make up for lost time and only come up with a band-aid solution for problems requiring surgery. 

While many FIs conduct fair lending risk assessments yearly, a dynamic risk management approach is ideal.  Update assessments regularly—quarterly, yearly, or on another time schedule—depending on the risk area and share all reports with the board and senior management. With regulators prioritizing redlining risk and carrying out cases, ensure your FI is staying updated on the latest regulatory news to update risk assessments and approaches as needed. 

Related: Fair Lending Risk Assessments: Absolutely Everything You Need to Know 

Ensure interdepartmental communication 

In the case studies provided, the FIs failed to address the redlining risk associated with their branch locations and marketing and sales activities when the data clearly showed issues, underlining the importance of interdepartmental communication.  

While compliance teams ensure an organization adheres to laws, regulations, and internal policies, every team member should be involved in the risk management process and know how their role impacts the bigger team. 

For example, suppose the product team is preparing to launch a new service or solution. In that case, other departments, including compliance, IT, and marketing, should be aware of the solution’s impact on the organization’s operational risk, fair lending risk, and other areas to ensure no compliance or risk gaps when the product goes to market.  

Don’t ignore regulators 

Every organization must communicate with regulators on the state and federal levels. If you receive recommendations from regulators, follow through. Prioritize the fix needed, speak with your team, and take the necessary steps to address the risk area immediately.  

Following through on your regulator findings also shows regulators that you take risk—redlining, fair risk, operational, or any other area—seriously, and they may be more likely to help you address issues in the future. After all, risk is inevitable; it’s how you prepare for and handle risk that makes the difference.  

Related: 4 Ways To Streamline Your CMS 

Don’t wait—act now.  

The institutions failed to act when their data and initiatives revealed redlining risk, as well as other forms of discrimination. This procrastination led to regulatory fines and penalties, and in one case, the institution was shut down. 

If your institution’s data and risk assessments reveal potential fair lending risk, take action to mitigate, monitor, and report on the risk immediately. 

The stakes are higher than ever for mortgage lenders, and one misstep can reap trouble if not appropriately addressed. Ensure your FI is taking proactive measures to ensure you address redlining risk. Remember, compliance is not just a responsibility. It’s a necessity. 

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