Redlining – The Collision of Fair Lending and CRA

WHAT?

For the past decade there has been a constant stream of enforcement actions against financial institutions for engaging in redlining. Redlining occurs when financial institution practices result in the restriction of lending in a particular geographic area, quite frequently a low-income or a high minority population area. Redlining is:

• Usually cited as a fair lending violation;
• Frequently listed as a weakness in a Community Reinvestment Act (CRA) management system;
• Quite often listed as both a fair lending and a CRA concern.

Fair lending laws, the Equal Credit Opportunity and Fair Housing Acts, prohibit illegal discrimination on a prohibited basis. CRA deals with income disparities, requiring financial institutions to meet the needs of their entire community, including low- and moderate-income areas.

In redlining cases, lending policies result in a lack of lending in certain areas. The financial institutions simply fail to meet the credit needs of its selected assessment area. The populations of the redlined areas are often high minority (fair lending) and low income (CRA). That is the collision of fair lending and CRA.

Recent cases include:

• On July 15, 2020, the Consumer Financial Protection Bureau (CFPB) filed a lawsuit against Townstone Financial, Inc., a nonbank retail-mortgage creditor based in Chicago, for violations of the Equal Credit Opportunity Act (ECOA); its implementing regulation, Regulation B; and the Consumer Financial Protection Act (CFPA). During February 2023 the courts reversed their position on this case.
• On August 20, 2021, the DOJ and the Office of the Comptroller of the Currency (OCC) announced coordinated actions to address allegations of redlining by Cadence Bank N.A.
• On October 22. 2021, the CFPB and the DOJ, in cooperation with the Office of the Comptroller of the Currency (OCC), took action to put an end to alleged redlining by Trustmark National Bank in majority-Black and Hispanic neighborhoods in the Memphis metropolitan area.
• On October 22, 2021, the DOJ announced the launch of a new Combatting Redlining Initiative.
• On October 22, 2021, CFPB Director Rohit Chopra said that the CFPB will be watching for “digital redlining, disguised through so-called neutral algorithms, that may reinforce the biases that have long existed.”
• On July 27, 2022, the Consumer Financial Protection Bureau (CFPB) and U.S. Department of Justice (DOJ) took action to end Trident Mortgage Company’s intentional discrimination against families living in majority-minority neighborhoods in the greater Philadelphia area. The CFPB and DOJ allege Trident redlined majority-minority neighborhoods through its marketing, sales, and hiring actions.
• On September 28, 2022, the Department of Justice (DOJ) announced that it has entered into an agreement with Lakeland Bank to settle the DOJ’s claims that Lakeland engaged in unlawful redlining in the Newark, New Jersey metropolitan area.

The concept of Reasonable Expected Marketing Area (REMA) has been used by regulators in recent years. REMA is not defined by law, is not covered in fair housing or CRA regulations, and is barely mentioned in examination procedures. For such a poorly defined concept it has caused big problems for many financial institutions.

The CRA regulations are in the process of being revised. The OCC, FDIC and Federal Reserve Board have not completed their CRA revisions. The program discusses how the concept of redlining is impacted by the revised CRA regulations.

WHY?

This program explains the concept of redlining and how to avoid the problem. It reviews recent redlining cases analyzing the problems in each institution that lead to the redlining charges, the penalties imposed, and the corrective action required in each case. It clarifies the concept of REMA.

Participants receive a detailed manual that serves as a handbook long after the program is completed.

TOPICS

Upon completion of this program participants understand:

• The concept of redlining;
• The interagency examination procedures used by the federal financial institution regulatory agencies to detect redlining;
• Steps to detect potential redlining and actions to take to minimize problems;
• The concept of Reasonable Expected Marketing Area and its impact in redlining cases;
• The issues present in recent redlining cases, the penalties imposed on each institution and the corrective action ordered by the regulators; and
• How the revised CRA regulations may impact the concept of redlining.

WHO?

This program is designed for members of the board of directors, managers of all lending departments, bank counsel, compliance officers, loan officers, and auditors.