Spotlight on Redlining

by Nancy Castiglione, CRCM

It couldn’t be a better time to hold refresher training on REDLINING. Redlining training couldn’t be more relevant than it is today (unfortunately). The U.S. Department of Justice has just announced a major new initiative that brings both federal and state law enforcement systems together to attack redlining. The initiative was announced with great fanfare by the DOJ jointly with the OCC and the CFPB on October 22nd.

Evidence of the uptick in enforcement is obvious in just two recent high-profile cases:

  • Cadence Bank in Atlanta, GA
  • Trustmark National Bank in Memphis, TN

The first case, against Cadence Bank, was announced in August jointly by the DOJ and the Office of the Comptroller of the Currency. The bank paid a $3 million civil money penalty for violations of the Fair Housing Act and Equal Credit Opportunity Act, and specifically for redlining in the Houston, TX area. In addition, the bank will be required to spend $5.5 million to expand its home lending in minority census tracts, increase its community development programs, and expand advertising, outreach, and financial education programs in Houston’s minority communities that were redlined.

In the second and more recent case announced by the OCC, DOJ and the CFPB in October, Trustmark National Bank had to pay $8.85 million, which included a $5 million civil money penalty, an investment of $3.85 million over five years in a loan subsidy program for Memphis residents in minority census tracts, minimum of $200,000 per year for the next five years in advertising, outreach and financial education programs in minority communities, and another $400,000 in community development programs.

{After you have your audience’s attention with the extreme danger of these redlining enforcement actions, proceed with basic definition information about REDLINING and REVERSE REDLINING.}

Redlining
Definitions of Redlining are readily available from sources such as Investopedia, Wikipedia, Dictionary.com, etc. The definition I like the best comes from the Federal Reserve Board’s Consumer Compliance Handbook:

the practice of denying a creditworthy applicant a loan for housing in a certain neighborhood even though the applicant may otherwise be eligible for the loan, referring to the presumed practice of mortgage lenders of drawing red lines around portions of a map to indicate areas where they did not want to make loans

Some definitions include both insurance and mortgage lending when describing redlining. Some descriptions of redlining ascribe the practice to all financial products and services, and not just mortgage lending and insurance. Redlining is illegal discrimination in violation of the Fair Housing Act and the Equal Credit Opportunity Act.

Reverse Redlining is not a practice that reverses the bad effects of redlining and makes anything better. In fact, reverse redlining is also discriminatory. Reverse redlining is typically when a business (or person) targets a predominantly minority neighborhood by selling its goods or services at a higher price than it would for the same products or services in a majority neighborhood where competition is higher. Targeting minority neighborhoods for higher prices or unfair terms is predatory.

How Redlining Impacts Communities
There is a lot of research that shows that the practice of redlining and other concerted efforts to deny mortgage loans and loan in general in communities based on the racial and ethnic characteristics of the population instead of the legitimate creditworthiness of individual applicants contributes to the deterioration of communities in many ways. Homes fall into disrepair for lack of funds to make home improvements. Communities suffer from a lack of economic opportunities and other services as another effect of disinvestment.

Redlining Risks
Most financial institutions don’t intentionally redline. They don’t actually draw red lines around neighborhoods that they want to avoid. Yet, there are practices that pose very real, direct redlining risks for financial institutions, almost as if they were redlining communities the old fashion way with a red-colored marker.

The industry should expect to see more redlining enforcement actions announced by the regulators in the near future. The DOJ/OCC/CFPB announcement portends more cases pending that are similar to the ones we’ve already seen.

Redlining: It’s more than where you originate loans

  • Where your branches are located – Both Cadence and Trustmark redlining complaints included findings that the banks located and maintained nearly all their branch locations in majority-White neighborhoods in the markets that they served. Branches were not located in portions of the community where minorities could easily access loan services.
  • Your marketing, outreach, and communications efforts – The banks also concentrated their outreach, advertising, and marketing in majority-White neighborhoods and avoiding majority Black and Hispanic neighborhoods, and in doing so generated fewer loan applications, which naturally led to fewer loan originations in minority areas of the community.
  • Access to mortgage loan officers – As a result of the location of the loan offices and lack of access to mortgage loan officers by Cadence and Trustmark, fewer loans were generated in minority communities.
  • Comparison to your peers – In addition to the bank’s own actions and performance, it is compared to its peers.
  • Current and historical performance – Cadence Bank’s redlining practices allegedly occurred from 2013 to 2017 and Trustmark’s redlining practices allegedly occurred between 2014 and 2018. More recent practices and progress made by the banks to address deficiencies has not helped avoid enforcement action. However, both banks have already implemented many steps toward a stronger fair lending compliance program and community lending reinvestment efforts, which likely helped them avoid even more stringent penalties.

Copyright © 2021 Compliance Action. Originally appeared in Compliance Action Vol. 26, No. 6, 10/31/2021

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