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Spotlight: Residential Real Estate
Fair Lending Compliance: Marketing and Redlining Analyses
The highly stressed and fragile current financial condition of many banks requires a heightened level of management oversight to address supervisory issues and mitigate operational risks. Executives at a number of the financial institutions that the Federal Reserve regulates have taken corrective measures by shifting priorities and reallocating resources to attend to and prevent safety and soundness concerns. While it is important for banks to focus on the soundness of their operations, bankers should also recognize the importance of maintaining a solid compliance posture to help reduce potential reputational, legal, and financial risks of noncompliance. There are serious consequences for not adhering to consumer laws and regulations.
From a compliance risk perspective, the evaluation of fair lending risk is an important exercise that banks should incorporate into their risk management program. A sound compliance risk management program should take into consideration fair lending risk when reviewing its policies and procedures, risk monitoring and management information systems, and internal controls. As a result of any review, board and senior management of a bank should be informed of any issues identified from a fair lending perspective that may pose a potential concern for the institution. In addition, immediate action should be taken to address any fair lending concerns resulting from these reviews.
Laws and regulation
Types of discrimination
There are many types of focal points that banks can use when performing fair lending analyses. Reviews may focus on one or more focal points such as analyses for underwriting, pricing, steering, credit scoring, marketing, and redlining. This article focuses on marketing and redlining.
Before going into the details of marketing and redlining analyses from a bank's self-analysis perspective, some preliminary work must be performed by compliance management, or whoever is assigned the responsibility to evaluate compliance risk at the bank, to better understand how to scope the reviews. First, the bank must understand the community it serves with respect to the economic environment, financial services needs, and market demographics.
Second, a bank must understand its credit operations structure. This understanding ranges from being familiar with the organizational structure to knowing the credit products offered by the bank and the use of policies, procedures, and process by which an applicant may or may not be granted credit. Finally, for marketing and redlining analyses, the bank should review its marketing initiatives and loan portfolio, respectively, to develop the scope of its review.
The FFIEC interagency fair lending guidance provides indicators of potential disparate treatment in marketing residential products, such as:
If any of the above risk factors is identified, then a marketing analysis should be conducted. The marketing analysis should identify all of the bank's marketing initiatives. These initiatives might include preapproved solicitations; media usage; self-produced promotional materials; relationships with real estate agents, brokers, contractors, and other intermediaries; and telemarketers or predictive dialer programs. Afterwards, a determination should be made as to whether the bank's activities show a significantly lower level of marketing effort toward minority areas or toward media or intermediaries that tend to reach minority areas. Finally, if there are disparities noted from the interagency fair lending guidance, a bank should document and address any issues raised in a timely manner.
Marketing efforts that are not monitored by management or where the compliance and legal departments are not consulted prior to the implementation of any marketing initiatives could lead to certain groups of people being denied the ability to obtain credit. This type of noncompliant behavior paves the way for redlining issues.
The FFIEC Interagency Fair Lending guidance provides indicators of potential discriminatory redlining, such as:
If any of the above risk factors are identified, then a redlining analysis should be conducted. The redlining analysis should identify and delineate any areas within the bank's CRA assessment area and its reasonably expected market area for credit products in predominately minority tracts. Furthermore, it should be determined (by the bank) if any minority area identified in the previous step is excluded, underserved, selectively excluded from marketing efforts, or otherwise less favorably treated in any way. The bank must also identify and delineate any areas within the bank's CRA assessment area and reasonably expected market area for credit products in predominately nonminority tracts that the bank may appear to treat more favorably.
Moreover, the bank should identify the location of any minority areas located just outside the bank's CRA assessment area and market area for credit products, and it should also analyze lending penetration in such areas. Excluding minority communities adjacent to a bank's assessment area may give the appearance of purposefully avoiding such areas. Finally, if there are disparities noted from the aforementioned steps, a bank should document and address any issues raised in a timely manner.
Keep in mind, however, that a bank's regulator may request to review the bank's self-analysis even though the bank may have already addressed and corrected an issue. Even if a self-assessment has been conducted by a bank, the bank's regulator may decide to conduct its own review to determine the extent of the problem. If the regulator concludes that a fair lending issue is egregious, it may cite the bank with a violation of ECOA, FHA, or both. Egregious fair lending violations would ultimately be referred by the regulator to the U.S. Department of Justice (DOJ), which would determine if further investigation is warranted. Negative results from a DOJ investigation could lead to possible civil monetary penalties and other issues that could negatively affect the bank from a legal and reputational risk perspective.
Complying with fair lending laws and regulations is very important. An effective compliance risk management program has a strong grasp on fair lending issues. Also, knowing that bank examiners include fair lending in the scope of their compliance examinations, banks should at all costs try to minimize their risk with respect to fair lending. As stated earlier, noncompliance with fair lending can be costly and detrimental to a bank's reputation. Depending on the circumstances, noncompliance with fair lending laws and regulations could also negatively impact a bank's CRA rating and expansionary activities, such as branching. All banks are encouraged to become very familiar with fair lending laws and regulations and conduct their own self-analyses to ensure that they are not discriminating against a protected class of applicants.
Erien O. Terry