Redlining is the illegal practice of refusing to make loans or imposing less favorable terms on a loan because of a prohibited basis, such as race, sex, age, marital status, religion, national origin, or gender identity of the residents in a neighborhood. (For you regulation sticklers, yes I know a merged a couple of regs. here).
Isn’t it wonderful how broad and gray this can be? So let’s break it down!
There is a methodology to see if you are choosing to just do business in the affluent areas versus the lower minority areas. This methodology is used by the examiner, so I think it is best practices for you to do the same thing. This way, when they present their findings you can out-data them with your findings.
Step One: Where do you lend?
Where you lend will determine your “footprint”. Regulators have yet to define your “footprint” for examination purposes, but legal consensus seems to believe that you should review your MSA as your footprint. In addition to that, it is important to see where your branches are located in the MSA as well.
Step Two: Research Your MSA’s
Where are you lending in each MSA. There are easy to use and inexpensive mapping software that will allow you to plot from an excel spreadsheet where you are currently lending. You can do this based on your closed loans, approvals, denials or anything else you may want to research.
Step Three: Review Your Concentration of Dots
Where are you lending in the MSA? Are there areas within the MSA that are high minority or underserved and you seem to be vacant there? Are the lower minority areas clustered with your dots? If so, you have some work to do.
Step Four: Diagnose the Market
Define why you have coverage in some areas and not in others. Is it personnel, marketing, or pricing and underwriting guidelines that are out of synch with that part of the market? Use the government databases (FFEIC) or other source to find out what the average homebuyer looks like in that area. Also, check to see what other lenders offer in that area. Once you have this information, you can check to see if your pricing, personnel coverage, marketing or underwriting guidelines are incompatible with these areas.
Step Five: Present Findings to Management and Make Decisions
Once you have completed a thorough analysis of your MSA’s, go to the executive with your findings and suggested remedies and potential risk. Make sure they understand the implications of ignoring these issues such as consumer advocacy complaints, fair lending exams with redlining findings and reputational risk. Also show them how they compare to other lenders as this will be exactly what the examiners do. Then present them with solutions in personnel, marketing, change of pricing or change of underwriting guidelines. If they are unwilling to explore those solutions have them consider viable business justifications that are backed by hard facts and data. This is probably where you will need to call in a fair lending analyst or legal counsel to make sure the business justification is viable.
Step Six: Document your research, monitoring and solutions to the examiner when called upon to do so, even if you are uncomfortable with the management’s decisions. By doing this you demonstrate that you monitor and seek solutions when an issue may exist. Just remember that you are on the lender team and whether or not you agree or disagree, you want to present the company rationale.