Redlining is a form of discrimination that violates the Equal
Credit Opportunity Act (ECOA) and Fair Housing Act (FHA)
on a prohibited basis, oftentimes on the basis of race. The core
concepts are simple:
■ ■ ■ Redlining is the practice of unlawfully denying credit to geographic areas with high concentrations of protected class
■ ■ ■ Redlining risk is the potential fair lending risk stemming from
the disproportionate lack of lending to majority-minority census
tracts within individual markets.
Redlining takes on many forms, including the illegal practice of
refusing to extend loans because of the predominant race, national
origin, etc., of the residents of a neighborhood where the property
is located. This also may include imposing loan terms that are
less favorable, again, due to the race or ethnicity make-up of the
property location. Some institutions overtly target certain
applicants or areas with less advantageous products or
services based on prohibited characteristics. In some
instances, minority applicants would ordinarily qualify
for a loan with an institution, except for the illegal practice
of the institution denying the loan based on a prohibited
basis. The term “redlining” is derived from the actual, literal
practice of mortgage lenders drawing red lines around areas
of a map where they refused to extend credit. Historically, these
locations were in predominantly majority-minority census tracts.
Lenders are permitted to deny loans due to credit worthi-
ness. However, lenders may not avoid extending loans based on
where the property is located (i.e., neighborhoods in majority-
minority census tracts) or on a prohibited basis. The redlining
challenge lenders face, from a compliance and fair lending risk
standpoint, used to be where applications were made, in relation
to the institution’s assessment area or “footprint,” as well as deni-
als, market penetration, and branch location. But there is more
to redlining risk than assessment areas, maps, and red sharpie
markers. Understanding the bank’s footprint (inside or out) is
achieved through root cause analysis and mitigates redlining risk.
To begin to understand a bank’s redlining risk, compliance
officers often use software solutions with mapping tools to show
the plot points where the bank made loans, where the bank re-
ceived applications, and where branches or ATMs are located. All
these data points are shown on a map which is overlaid against
color coded areas to show the minority levels of the census tracts.
Competitors or peer origination data, as well as income levels of
the census tracts are often shown visually as well.
In addition to conducting a visual analysis, bankers use data analytics of applicant and loan volume and compare their activity to
other peers in the market to determine their redlining risk level.
The bank will need to determine how well it is penetrating the
market compared to its peers. (See Conducting Basic Redlining
Analysis, on page 10 of this issue.)
Depending on the risk rating, a regulatory agency will con-
duct their own root cause analysis review on lending data. For
example, the Office of the Comptroller of the Currency (OCC)
will perform a root cause analysis if a lender earns a “high risk”
evaluation rating for three consecutive years. The areas for review
may include the lender’s denials, originations, market penetra-
tion and branch locations and overall rating. Banks should be
reviewing their records in each of these areas too.
Redlining Root Cause Analysis
There used to be “easy” answers to explain potential redlining
risk, where a lender’s assessment area included a large national
park or a prison, to explain why applicant or loan volume was low.
However, one area lenders should focus redlining risk mitigation
efforts on is root cause analysis, or answering the “why” behind
■ ■ ■ “who” ( applicants versus borrowers);
■ ■ ■ “what” (credit-worthiness);
■ ■ ■ “where” (location of a property);
■ ■ ■ “when” (the timing of when credit was extended); and
■ ■ ■ “how” (a lender’s credit policy criteria).
Geography is still a key factor though. When in doubt… Google
it! Outside of a lender’s standard mapping software, or the publicly available mapping via Geocoding, inputting addresses into
Google Maps helps to inform a lender’s redlining story. Google
IS TOCK / PORCOREX 6 | ABA BANK COMPLIANCE | SEPTEMBER–OCTOBER 2019
Redlining takes on
many forms, including the
illegal practice of refusing
to extend loans because of the
predominant race, national origin, etc.,
of the residents of a neighborhood
where the property is located.