Redlining in real estate is a discriminatory practice that limits access to services based upon demographic characteristics such as race, ethnicity, and household income in specific neighborhoods. The term comes from the illegal practice of drawing a red line on a map around areas where institutions did not want to extend credit. These practices can result in locking out those who need access to financial services the most. The protected classes and communities impacted can suffer significant consequences, from being less likely to experience homeownership and financial independence to a decrease in socio-economic wellbeing.
Financial institutions are in a position to not only stay compliant with fair housing regulations but to extend equal lending opportunities in their market area. This blog will outline the preventative measures lenders can take to remain compliant with redlining laws by understanding your market, evaluating your strategies, and taking advantage of compliance technology.
As it pertains to the mortgage industry, redlining denies important financial services like mortgages, insurance, and loans based on particular geography and its history rather than on financial qualifications. When lenders take part in redlining, it can perpetuate economic gaps and discriminatory practices, and its impacts can be felt for generations.
In order to identify, prevent, and mitigate redlining mortgage risks, lenders and financial institutions need to understand their market areas, evaluate their marketing, and invest in regulatory compliance technology.
The Community Reinvestment Act (“CRA”) requires that any financial institution “shall delineate one or more assessment areas within which the FDIC evaluates the bank's record of helping to meet the credit needs of its community.” Lenders need to regularly evaluate and increase understanding of their bank’s market area or potential market areas. It is important to understand the racial, ethnic, and household income of the tracts in which you serve, as well as those who are just outside your market area.
Financial institutions should verify loan staff is familiar with the market area and how to best serve different neighborhoods and demographics within the market area, as certain geographies will require different practices. Periodically review the market area, including demographics, with all applicable staff, especially if your banking institution has expanded or changed areas.
One regulatory practice that will help motivate compliance preparation is the Reasonable Expected Market Area (“REMA”) review. Lenders and banks should prepare for a REMA review and be proactive in anticipation of it.
For all marketing efforts, develop measurable goals by which to determine how each demographic responds to different campaigns and to ensure no group is excluded. Consider if your employee compensation and incentives are properly aligned to your marketing goals. Don’t market exclusively by zip code or geo-targeting techniques. Design and test advertising content to ensure marketing efforts are attractive to all demographics.
Keep in mind, your institution is not the only group that can impact your compliance with redlining fair lending regulations — it’s also the third parties and other brokers with which your institution partners. Stay on top of the marketing efforts of your partners to ensure that your efforts are not contradicted by those of others.
While the mortgage industry has historically been slow to embrace the financial technology available today, there are fintech options designed specifically to keep lenders in compliance with redlining fair lending regulations.
The review process for redlining mortgage violations can be tedious and sometimes can take months. With modern technology, such as Asurity’s RiskExec Redlining/REMA feature, you can run a redlining risk analysis in as little as 10 minutes. Not only does technology like this analyze redlining risks, but it also provides solutions for mitigating redlining discrimination moving forward to better serve your institution and your community.
Redlining can consume tremendous time and resources. Take back your time and confidently prepare for exams with RiskExec. RiskExec is the only compliance solution offering a dedicated redlining analysis tool that streamlines the review process to help identify in-scope geographies, select peers, generate relevant analytics, and concisely display results. Our Redlining Analysis module condenses days, weeks, and sometimes months of work into a 10-minute setup with a comprehensive analysis and summary produced within minutes. Learn more today.
In this blog concerning legal and regulatory matters of interest to the mortgage industry, Sandler Law Group (SLG) provides general information and industry observations that are not motivated by or concerned with a particular past occurrence or event, or a specific existing legal problem of which SLG is aware. Nothing published herein is intended to constitute legal advice and the use of the newsletter by a reader shall not give rise to an attorney-client relationship with SLG. SLG expressly disclaims any representation of accuracy or reliability as to the content of this newsletter, as well as any obligation to maintain such content over time or to ensure it is free from errors. Brad Cope is the attorney responsible for the SLG content of this newsletter. The attorneys of SLG are not certified by the Texas Board of Legal Specialization.
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