Best Practices to Avoid Redlining
Written by: Rob Ellis, Senior Compliance Consultant, CRA & Fair Lending Specialist
Plotting the geographical areas from which your institution has received applications and originated residential loans is the foundational step to assessing your Reasonably Expected Market Area, or REMA. But defining your REMA goes beyond simply plotting dots on a map. To ensure accuracy and avoid fair lending pitfalls, lenders must consider a broader range of factors and understand the serious implications of practices like redlining.
What is Redlining?
Redlining is a form of illegal disparate treatment in which an institution provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located. Redlining may also include “reverse redlining,” the practice of targeting certain borrowers or areas with less advantageous products or services based on prohibited characteristics. The term originated from the historical practice of literally drawing red lines on maps to designate areas where financial services would be withheld. Redlining is a violation of fair lending laws, including the Fair Housing Act and the Equal Credit Opportunity Act.
Key Factors to Consider When Defining Your REMA:
Strategic Plans & Marketing: Do you have any strategic plans or marketing strategies that define targeted areas for business development? These areas should inform your REMA.
Loan Officer Territories: If your loan officers are assigned to specific territories, these areas are inherently part of your expected market and should be included.
Marketing and Outreach Activities: Where do your radio or TV advertisements reach? What geographical areas do your direct mailers target? Where are your online ads displayed? What geographical areas do your website visitors come from?
Physical Presence: The locations of your branches and loan production offices are foundational to your REMA.
Third-Party Relationships: Any relationships with mortgage brokers, real estate agents, or other third parties that generate applications for your institution should also inform your REMA, as these indicate areas where you actively receive business.
Best Practices to Avoid Redlining:
The most crucial step in avoiding redlining is consistently monitoring your lending data. At a minimum, you need to understand:
Percentage of applications and originations from majority-minority census tracts: This is a key metric regulators examine.
Comparison to Peer Lenders: This is perhaps the most critical component. In every Department of Justice fair lending redlining case in the past five years, the lack of comparative lending data was a cited factor. These cases consistently showed that cited lenders were two to three times deficient in their lending to majority-minority census tracts compared to their peers.
If your data indicates that you are lagging behind your peers in lending to these areas, it's not enough to simply acknowledge it. You must have a clear action plan in place. This plan should demonstrate to examiners that you are taking proactive steps to increase your percentage of applications and originations in majority-minority census tracts. Proactive monitoring and a responsive strategy are essential for demonstrating fair lending commitment and mitigating risk.
For more information on REMA, redlining, or your current lending data monitoring program, send a message through our Online Contact Form here. Or, contact our Director, Bill Dolan at wdolan@scapartnering.com or by phone at (617) 694-2617 and schedule a time to connect with us.
