The U.S. Department of Justice (DOJ) announced recently that through its “Combatting Redlining Initiative,” it has secured more than $107 million in relief for communities nationwide experiencing lending discrimination. Attorney General Merrick Garland declared,
“This work is just the beginning – the Justice Department currently has over two dozen active investigations into redlining, spanning neighborhoods across the country.”
Since 2021, the Department has secured 10 settlement agreements with lending institutions intended to provide credit opportunities to communities that may have previously been redlined. That work has intensified lately.
In the last quarter of 2023 thus far, the DOJ has filed complaints and entered consent agreements with two lenders related to redlining allegations. There are some common threads among the DOJ’s redlining assertions that lenders unlawfully avoided providing home loans and other mortgage services to majority- Black and Hispanic communities, without a business necessity for doing so. The DOJ listed the following factors as partially contributing to its various Fair Lending claims:
- Branches were located in a manner to serve the credit needs of residents in majority-white neighborhoods and avoid serving the credit needs of majority-minority neighborhoods.
- Mortgage loan officers were located in and primarily served credit needs of majority-white but not majority-Black and Hispanic neighborhoods.
- Peer lenders received significantly more applications from minority applicants and neighborhoods than the subject lender.
- Advertising and marketing efforts targeted mostly majority-white areas, with minimal effort in majority-Black and Hispanic areas.
The Combatting Redlining Initiative signals a need to recommit to a strong Fair Lending initiative. ADI offers the following insights into actions institutions can take to withstand increased scrutiny.
Strengthening the CMS
One of the first places regulators will look to assess an institution’s commitment to Fair Lending, in general, is its compliance management system (CMS). This CMS should include policy, procedures, training, monitoring, and evidence of the board and senior management’s commitment to Fair Lending. Each function in this system must work together.
For example, an evaluation of the distribution of mortgage applications and loans may reveal fewer applications received from minority-majority applicants and neighborhoods. Senior management and the board of directors should analyze factors contributing to the findings and determine whether these areas are underserved and what actions the lender should consider to better meet the community’s credit needs.
Policies and procedures should address regulatory requirements and prohibitions, personnel responsibilities, and marketing and community outreach goals. Training must be ongoing and include specified instruction to address weaknesses noted during Fair Lending reviews. Managers with specific Fair Lending enforcement authority should be appointed.
The CMS must be kept current, and written procedures and plans must be properly administered. A written procedure or plan with a Fair Lending goal that is not completed will draw an immediate reaction from a regulator, such as when designated committees do not meet or plans discussed are not implemented. A recent redlining complaint described an instance where Fair Lending or compliance personnel offered suggestions for enhancing areas of weaker Fair Lending performance, and those suggestions were not effectively implemented. This is a good indication that regulators are alert to “in name or procedure only” efforts that sometimes remain in institutional procedures but have no real impact on activity. Accordingly, review policies and procedures at least annually to ensure they are updated, analyzed, and executed regularly.
At times, a lender may choose not to move forward with a discussed plan for good reason; here we refer more to documented action items that stay in procedures without implementation or removal year after year.
There may be many factors contributing to apparent issues with a lender’s application and loan distribution. A comprehensive evaluation of demographics, such as housing and employment, competition, and resources, will identify those factors and react appropriately. Board minutes and Fair Lending risk assessments and audits should illustrate the board’s involvement in analyzing and acting to meet the credit needs of the underserved to the extent possible.
What Regulators Expect
The consent agreements entered into by lenders accused of redlining violations provide insight into regulatory Fair Lending program expectations. The agreements included the following type initiatives:
- Implementing a detailed Fair Lending Plan;
- Conducting a Community Credit Needs Assessment for majority-minority census tracts within the lenders’ identified assessment areas;
- Designating a full-time Director of Community Lending;
- Opening a full-service facility in a majority-Black and Hispanic census tract;
- Investing substantially ($7.5 million in latest case) in a loan subsidy fund; and
- Spending significantly ($200,000 per month in recent case) on advertising, outreach, and consumer financial education targeted to residents of majority-Black and Hispanic census tracts in the assessment area.
The redlining cases filed through the Combatting Redlining Initiative follow similar patterns and signal actions bank management can take to discover risks ahead of the regulators. Board minutes should reflect that branch location, community outreach, advertising and marketing, and loan origination production are all considered in light of Fair Lending objectives. Senior management and the board must also demonstrate willingness to follow through and resolve Fair Lending risks or issues.