Redlining risk: slaying the three-headed dragon.

AuthorBaylor, Brenda

CONCERNS ABOUT REDLINING HAVE INCREASED REGULATORY SCRUTINY in recent years--so much so that lenders' compliance risk has grown into a three-headed dragon looming over the mortgage business, consumer lending activities and Community Reinvestment Act (CRA) program. [paragraph] In managing that risk, most lenders recognize that regulators' approach to redlining reviews is not an exact science. With different agencies using different methodologies, dragon-slaying in today's regulatory environment has become an exercise in running redlining analytics on numerous scenarios to hunt down every possible red flag and taking proactive measures to prepare for examinations.

Looking for the beast: Where to focus your redlining review

In the realm of financial services, redlining practices were outlawed in the 1970s by the Equal Credit Opportunity Act (ECOA), Community Reinvestment Act and other fair lending pronouncements. Consequently, regulatory scrutiny of redlining risk evolved into a "two-headed beast" that often required formal surveillance as part of a bank's CRA and fair lending monitoring programs. For years, redlining reviews have been focused on mortgage lending activities (i.e., those reportable under the Home Mortgage Disclosure Act [HMDA]) to prevent disproportionate residential real estate lending from occurring based on a prohibited factor within a particular geographic area (such as a county, census tract or neighborhood).

Today regulators have renewed interest in preventing redlining activities from harming minority neighborhoods and other areas predominantly occupied by protected classes or low-to-moderate-income (LMI) individuals.

To further complicate matters, there is now a third head on the "redlining dragon," namely non-HMDA lending activities (i.e., other consumer loan types not reportable under HMDA, such as credit cards and auto loans).

Because of the broadened scope of redlining risk, it is more important than ever for lenders to ensure their fair lending and CRA teams collaborate on redlining reviews to increase efficiencies via information leveraging, correlate risk across lending products and better position their institution for regulatory examinations.

As a basic concept, a redlining review provides a geographic evaluation of lending distribution patterns in majority-minority versus non-minority geographies, or LMI versus non-LMI geographies, to identify potential areas of fair lending risk. Ultimately the objective is...

To continue reading