Consumer Affairs: Redlining Risk Factors and Mitigating Controls

November 3, 2017


Redlining continues to be an area of supervisory focus for regulators. Although regulatory requirements regarding redlining set forth in the Equal Credit Opportunity Act and the Fair Housing Act have not changed, increased public scrutiny as the nation weathered and recovered from the Great Recession has put a spotlight on redlining.

The 2009 Interagency Fair Lending Examination Procedures define redlining as the act of “provid[ing] 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, however, is not limited to residential real estate lending, as it extends to all credit products. When assessing fair lending risk in relation to redlining, examiners focus on the subject bank’s credit activities in majority-minority census tracts, which are geographies where 50 percent or more of its residents identified themselves as a minority, particularly as Black and/or Hispanic, in the U.S. Census. As such, the designation of a majority-minority census tract may change as demographic shifts are recorded.

Key Risk Factors and Controls to Mitigate Redlining Risk

The main redlining risk factors that examiners focus on are: Community Reinvestment Act (CRA) assessment area (AA) delineation, branching network, lending performance, and marketing and outreach activities. These factors, as well as the presence of complaints alleging discrimination, overt statements noting a preference based on a prohibited basis, and fair lending findings noted at a previous supervisory activity or internal review, should always be considered as part of the bank’s periodic redlining risk assessment.

CRA AA Delineation

Key Risk Factor: The bank’sdelineation of its AA is inconsistent with the regulatory requirements set forth in the CRA, particularly if it excludes majority-minority census tracts and partial counties and/or metropolitan areas are noted. CRA allows for an AA to “only include portions of a political subdivision if the AA would be extremely large, of unusual configuration, or divided by significant geographic barriers”, as long as it does not reflect illegal discrimination.

Risk Controls:

  • Develop and adopt policies and procedures that require the periodic review of the bank’s CRA AA(s) to consider the implications of opening/closing branches and/or loan production offices, acquiring and/or merging with another institution, and changes in lending patterns and demographics.
  • Document the bank’s rationale for the delineation of its CRA AA.

Branching Network
Key Risk Factor: The bank does not have branches or loan production offices in majority-minority census tracts.

Risk Control:
Document the bank’s rationale and consideration of fair lending risk regarding its branching structure and strategic direction.

Lending Performance
Key Risk Factor: The bank’s lending in majority-minority census tracts is significantly below the performance of peers.

Risk Control:
Track and monitor the bank’s lending performance in majority-minority census tracts, specifically the Home Mortgage Disclosure Act and CRA data (as applicable), over a rolling period of three years and compare it to adjusted aggregate lenders in the market.

Marketing and Outreach Activities
Key Risk Factor: The bank’s marketing and outreach activities do not target and/or promote lending in a meaningful manner in majority-minority census tracts.

Risk Controls:

  • Track and monitor the bank’s marketing and outreach activities related to credit availability to ensure efforts do not exclude majority-minority census tracts.
  • Conduct meaningful marketing and outreach activities that promote lending to majority-minority census tracts(e.g. use media that specifically targets minorities
    and minority areas, and develop relationships with realtors, brokers, and other third parties that serve in minority areas).
For additional information on redlining, please reference the October 4, 2016 Outlook Live webinar - 2016 Interagency Fair Lending Hot Topics and the materials presented at the 2016 Regulatory Update Seminar.  In addition, monitor the enforcement cases presented by the Department of Justice and the Department of Housing and Urban Development as it may assist you in understanding how to better assess redlining risk in your institution.  If you have additional questions, please reach out to your designated Consumer Affairs contact.