Maps includes satellite imaging that accounts for current data to
explain why a lender may have limited lending in an area within
their footprint. In addition to satellite imaging, Google Maps also
provides updated street-level viewing for neighborhoods that is
ordinarily unavailable through standard compliance-software
modules. The purpose of root cause analysis should not be to
only understand the institution’s redlining risk, but also to defend
and explain the market area(s) strategy. Demonstrating awareness
of an institution’s footprint by considering the above-mentioned
variables, is key to root cause analysis.
Root cause analysis demonstrates an institution’s proactiveness
to the consumers they service, the industry as a whole, and the
shifting growth and evolution of their assessment areas. Root cause
also factors in variables that may not ordinarily be considered in
a standard mapping exercise to help explain lending practices.
While the expectation remains that redlining prevention is part
of an overall fair lending program, lenders should consider the
often-overlooked root cause analysis as a critical strategic step
in providing a holistic and comprehensive view of their lending
practices. Root cause analysis enables institutions to maximize
revenue and support community outreach, while at the same time
mitigating potential fair lending redlining risk.
Root cause analysis should involve all key stake holders of the
institution. This enables the entire institution to understand and
take ownership of the holistic view of redlining risk.
Step 1: Look at Your Numbers
Lenders should look beyond assessment area maps and understand
other variables, such as channels, by which applications are received.
For example, a lender may have three distinct lending channels
including retail, wholesale lending, and online applications. By
analyzing and addressing redlining by channel, the lender may
demonstrate that what appears to be redlining risk is explained
by channels. In other words, a lender should perform an analysis
of each channel within a given market rather than looking at the
combination of channels together. In one market, the retail side
could be driving your redlining risk while the wholesale and online areas are in line with expectations. You may have a different
scenario in a second market where perhaps the online applications
are skewing your results. It’s important to start with what your
numbers are telling to help hone your analysis. In other words,
it is important and valuable to understand alternative variables
and segment the data population (i.e., channels) accordingly to
get a more realistic view of the redlining risk.
It’s also important to stay focused on factors that could impact
the particular redlining risk presented for the market. For example,
if your analysis shows that your denial rates were significantly
higher than your peers, you might focus on your credit practices.
However, if your analysis points to a market penetration risk, then
your root cause analysis should consider what might be preventing the bank from getting applications in high minority areas.
Step 2: Gather Data About the Market
Once you have a firm grasp on what the numbers are telling you,
it’s time to learn everything you can about the market itself. A
good place to start is information that is publicly available. For
example, the U.S. Department of Housing and Urban Development
(HUD)’s Office of Policy Development and Research publishes
a comprehensive housing marketing analysis for many markets
that provides details on the underlying economic conditions and
housing trends that could impact your ability to lend.
Gathering data about the market means considering:
■ ■ ■ Market demographics
■ ■ ■ Competition
■ ■ ■ Complaints
■ ■ ■ Internal factors (e.g. operations)
■ ■ ■ Internal Partners (CRA team)
When reviewing publicly available data, be sure to review the
market demographics. As an example, you may learn that the area
is a hit with the younger crowd. While age is a prohibited basis by
which lenders may not discriminate, lenders should review the age
of applicants in their assessment areas to explain denial rates. If
the properties in an urban area are valued at $750,000 and above,
but the majority of residents are renters that are newly graduated
from college with minimal starting salaries and student loan debt,
they may not qualify for a loan based on debt-to-income ratio.
In this situation a lender may want to consider developing a new
product that supports first time homebuyers. Alternatively, lenders
should ensure that existing first-time homebuyer programs are
available and reasonably extended to all creditworthy applicants
in their assessment areas, regardless of age.
When considering the external lending environment, be sure
to take a look at the competition. Peer performance review is
a standard practice of redlining analysis. Combined with an
expanded understanding of the demographic/area, a lender’s
peers—particularly if the peer has a unique or targeted business
mode—is another meaningful variable for root cause analysis. For
example, if English is not the predominant language in a market
area, this could help explain low volume of applications. If a lender
only has one branch location in an area that is predominantly
Spanish-speaking, and the peer competitor lenders in the area
have established, long term business models that are targeted to
Spanish-speaking applicants, this would explain potential redlining risk. Lenders in this situation should consider ensuring the
market managers and employees within these branches and areas
understand who they are lending to and serving. Although a
financial institution’s market strategy is set forth by Executive
Management, the input from market leaders that are embedded
in the actual footprint is critical. This input would also be valuable
Root cause analysis demonstrates
an institution’s proactiveness to the
consumers they service, the industry as
a whole, and the shifting growth and
evolution of their assessment areas.