The U.S. Department of Justice (DOJ) continues its “Combatting Redlining” initiative. Since September 18, 2024, the DOJ has filed four redlining consent orders, including three against nonbank lenders. However, all lenders can glean valuable lessons from the events and circumstances set forth in these complaints and consent orders.

Risk Assessments, Monitoring, and Testing

The first lesson is that mortgage lenders must have a fair lending monitoring and testing program that includes redlining. One recent complaint alleged that a lender “had not conducted a single redlining risk assessment” despite findings  and concerns identified in past audits and regulatory examinations indicating fair lending risk and inadequate monitoring. Another complaint notes that the lender did not conduct fair lending assessments or evaluations of ECOA and FHA compliance for the first four years of the six-year period covered by the consent order.

Once a monitoring and testing program is established, it may be insufficient for a lender to limit its redlining monitoring to majority minority census tracts (MMCTs), or even majority Black and Hispanic census tracts (MBHCT)s. In the most recent redlining complaints and consent orders, DOJ has focused on a variety of minority neighborhood types. While two of these orders evaluated lending in MBHCTs, one of those also assessed lending in high Black and Hispanic census tracts (HBHCTs). Another enforcement action focused on majority Black, Hispanic, and Asian census tracts (MBHACT). A fourth concentrated on lending in majority Black census tracts (MBCT) and high Black census tracts (HBCT). Adequate monitoring and testing for redlining should consider the types of minority communities in the lender’s footprint and monitor accordingly.

As a corollary, lenders must take action to correct shortcomings identified through their monitoring and testing programs. Three of the four recent complaints note that internal monitoring, audits, or examinations either did or should have identified redlining risks, but the institutions’ responses were inadequate to mitigate the risk.

Location, Location, Location

Second, lenders with a physical presence must consider branch and loan production office locations to adequately evaluate redlining risk. In all four complaints, loan office locations, along with patterns in opening and closing loan offices, were identified as evidence of redlining. In addition, the bank and credit union complaints cited the location of branch networks as indicia of redlining.

For lenders subject to the Community Reinvestment Act (CRA), evaluation of locations should incorporate a review of CRA assessment areas through a fair lending lens. Assessment areas excluding adjacent minority neighborhoods increase redlining risks, especially if the assessment area includes partial counties.

In addition, lenders should consider locations where their marketing materials are displayed, including locations of marketing vendors. One recent consent order cited marketing services agreements with real estate companies, noting that those real estate companies maintained their offices in majority-White areas. Further, an overwhelming majority of the real estate listing addresses where the lender’s materials were displayed were  located in majority White neighborhoods. The DOJ alleges the lender did not take corrective action to ensure its marketing materials were also displayed at listing addresses in majority Black areas.

Borrower Demographics

At least one complaint also considered the race and ethnicity of applicants and borrowers in minority census tracts. This particular complaint notes that, within loans secured by properties in MBCT,  peers’ borrowers were nearly twice as likely to identify as Black according to HMDA data. Patterns of lending to newcomers instead of existing residents are often associated with gentrification and displacement of long-term residents. A study by the National Community Reinvestment Coalition found that gentrification often displaces Black and Hispanic residents, especially in larger cities.[1]

Marketing and Outreach

Lenders should also evaluate their marketing, outreach, and business development practices. At one lender, a review found  approximately “300 of these advertisements contained an image of a person, such as a loan officer, a real estate agent, or a model, with about 99% containing at least one image of a person who appeared to be white and only about 11% containing an image of a person who appeared to be Black.”[2] At another, the DOJ complaint noted that the lender’s website featured families that appeared to be non-Hispanic White more frequently and prominently than racially and ethnically diverse families.[3]

The DOJ cited a lack of loan officer diversity, including racial diversity and bilingual status, in some complaints. This focus is consistent with past research indicating that disparities in applications and originations are significantly lessened, and post-origination defaults are reduced, when minority borrowers work with minority loan officers.[4] Lenders whose mortgage loan officers do not have personal connections to minority communities may struggle to engage with, and meet the credit needs of, those communities.

A lack of branches and loan production offices may contribute to difficulties in reaching minority census tracts. Assigning or incentivizing loan officers to serve minority neighborhoods may help offset a limited physical presence. Building diverse referral networks may also help mitigate redlining risks.

Additionally, some of the complaints stated that lender marketing and advertising did not reach, or was ineffective at reaching, minority neighborhoods. In one instance, less than 3 percent of direct marketing during a three-year period was mailed to addresses in MBCT, even though 33 percent of census tracts in the MSA were MBCT.

Email Communications

In two complaints, the DOJ presented internal communications as evidence in support of redlining allegations. Emails described minority communities as “ghetto” or “hood” areas. One email called a minority customer’s acquaintances “thug friends.” Other emails used derogatory terms for African Americans. In at least one instance, the lender waited nine months to caution the loan officer regarding the inappropriate language used in emails.

Trends

As with past redlining consent orders, the recent consent orders were based on multi-year patterns of underperforming relative to peers or the market with respect to lending in minority neighborhoods. In some cases, periods of five years or longer were assessed. In examinations, some federal regulators specify trend analysis as part of redlining risk assessments. Even when not required by a lender’s regulator, evaluation of trends in lending patterns and peer comparisons will strengthen fair lending compliance systems.

Lessons Learned

To summarize the lessons learned from recent redlining enforcement actions, lenders should recognize the following when assessing their redlining risks:

• Any minority tract type that exists in your markets may be the subject of regulatory scrutiny or enforcement activity. If your lending footprint includes minority neighborhoods that are predominantly Asian, Black, Hispanic, Native American, or Native Hawaiian / Pacific Islander, or areas with high (greater than 80 percent), concentrations of minority you may wish to assess lending patterns and perform peer comparisons in those areas relative to predominantly White areas.
• Location opening and closing policies and procedures, as well as compliance analyses of locations should consider loan production offices in addition to branches.
• Banks should also evaluate their CRA assessment areas to determine whether assessment area delineations exclude adjacent minority communities.
• Do not stop at evaluating your lending in minority neighborhoods. Assess borrower demographics in those areas. If most of your borrowers in minority geographies are non-Hispanic Whites, consider how you can better reach minority borrowers in those communities.
• Take a deep dive into your marketing and outreach data. Are you marketing in both minority and non-minority communities? Does your lending staff have community connections? Do your referral networks and community partners help you reach diverse communities? Do your marketing materials indicate that borrowers of all demographic groups are welcome?
• Does your institution have policies to caution employees regarding derogatory or discriminatory language in emails and text messages? When such conversations are identified, does the lender take prompt actions to correct the behavior?
• When assessing redlining risk, does your institution consider multi-year performance trends? Gaps in lending or branching patterns or areas of underperformance relative to peers that persist for multiple years signify greater redlining risk.

ABOUT THE AUTHOR

Lynn Woosley is a Managing Director with Asurity Advisors and a member of the Editorial Advisory Board of  ABA Risk and Compliance magazine and Case Western Reserve University’s Women in Finance Advisory Board. Lynn has more than 30 years’ risk management experience in financial services, regulatory, and consulting environments. She is an expert in consumer protection, including fair lending, fair servicing, community reinvestment, and UDAAP. Before joining Asurity Advisors, Lynn led the fair banking practice for an advisory firm. She has also held multiple leadership positions, including Senior Vice President and Fair and Responsible Banking Officer, within the Enterprise Risk Management division of a top 10 bank. Prior to joining the private sector, Lynn served as Senior Examiner and Fair Lending Advisory Economist at the Federal Reserve Bank of Atlanta. Reach her at lwoosley@asurity.com.

[1] https://ncrc.org/wp-content/uploads/2019/03/NCRC-Research-Gentrification-FINAL.pdf. Other studies, such as https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2019/wp19-30.pdf?la=en, have found benefits of gentrification that may offset some costs.

[2] https://www.justice.gov/crt/media/1373501/dl

[3] https://www.justice.gov/crt/media/1383446/dl

[4] https://www.nber.org/system/files/working_papers/w30125/w30125.pdf