As US banks of all sizes study the extensive final Community Reinvestment Act (CRA) Rule and devise appropriate implementation plans, the adage “a picture is worth a thousand words” should be front of mind. We look at how mapping can be instrumental in identifying and mitigating redlining and other risk factors.
Since President Biden signed Executive Order 13985 – Advancing Racial Equity and Support for Underserved Communities Through the Federal Government – in 2021, and the Department of Justice (DOJ) subsequently launched its Combatting Redlining Initiative, we have seen an increased focus on this form of discrimination. The DOJ has since announced redlining settlements with 10 banks and mortgage lenders, with 24 investigations pending.1
Redlining is a type of disparate treatment in which a lender provides unequal access, or terms of credit based on a prohibited characteristic, to the residents of an area in which the borrower resides or will reside, or in which a residential property to be mortgaged is located. For example, a blanket avoidance of providing home loans and other mortgage services in majority Black and Hispanic neighborhoods would constitute redlining.
Commensurate with the heightened regulatory focus and scrutiny that has resulted in the recent increase in redlining enforcement actions, the FDIC (among other agencies) is encouraging banks to generate maps plotting both loan applications and originations to proactively identify – and, critically, address – any potential disparities. Maps can help visually identify any gaps in loan applications and originations, particularly within majority-monitory and low-income census tracts.
A visual analysis may make it easier to spot any ‘donut holes,’ or areas with few loans and applications in the bank’s Reasonably Expected Market Area (REMA). If these areas of low activity have a racial or national origin character, a redlining violation may occur. If a bank finds that it has a relatively small number of loans and applications from such areas, it should consider if it has policies or practices that led to this disparity and whether it should implement any changes to increase lending volume in those areas.2
As one of our team’s core competencies, we at Capco routinely support requests for loan activity mapping from our clients. For example, we often perform a Fair lending Statistical Analysis (FLSA), including an aggregate analysis, based on an institution’s Home Mortgage Disclosure Act (HMDA) Data. We leverage our proprietary CRA/Fair Lending Explorer Tool in performing the FLSA.
We subsequently map the bank’s REMAs and plot where they received loan applications and originated loans, overlaying the demographics of the census tracts, including majority Black and Hispanic tracts. The maps and aggregate analysis provide our clients with the information they need to effectively geocode application and lending activity, compared to aggregate, providing support to quickly address any noted disparities.
Banks have an ongoing duty to monitor their business practices to identify and mitigate all types of fair lending risk, including redlining. Additional relevant resources are available from the regulatory agencies and leading trade associations, including the ABA, ICBA, and others. This includes the interagency fair lending examination procedures which contain detailed descriptions of the examination process and provide insight into how examiners seek to identify potential fair lending violations.
It is increasingly important for institutions to strengthen their fair and responsible banking programs by developing or conducting risk assessments, performing periodic statistical analyses, creating maps of loan activity, and monitoring and testing to ensure ongoing compliance with all fair lending laws and regulations. In doing so, banks should aim to leverage a series of appropriate tools and resources, including self-assessments and program reviews.