ABA Bank Compliance - March/April 2017

How to Ensure

I STAND AT THE FRONT OF THE ROOM.
A slide from the training presentation is projected behind me,
and the loan officers before me think their surreptitious glances
at the clock are going unnoticed. I find familiar words tumbling
from my lips—words I have said many times in front of many
similar audiences:
“Redlining is the practice of soliciting loan applications from
certain areas, such as higher income or predominantly white areas,
while avoiding applications and originations in other areas that
have a higher concentration of minority residents. The laws that
govern this type of activity were put in place in the 1970s, when
discrimination in lending was much more common than it is
today. Now, I know that of course you don’t discriminate! Obvi-
ously, we want to make as many loans as possible.”
But I find myself doubting my own words as I say them. Is it
accurate to insinuate that redlining is really a relic of the past? Do
I actually know that no one sitting in class with me has allowed
their own personal biases to affect their interactions with clients?
The potential ramifications of a redlining and/or fair lending case
brought by regulators is enough to cause even the most exhausted
among us to suffer from insomnia. Recent events show that what
starts as an indication of redlining can expand to other, dare I say,
more traditional fair lending concerns. Newspaper headlines that
include the word “discrimination,” and civil money penalties in
the millions are haunting in that way.

A Pew Research Center study from early 2016 indicated 66% of
African American respondents said that black people are treated
less fairly than white people when applying for a mortgage loan1.
Data gathered and analyzed by members of the National Bureau
for Economic research shows that, in fact, this perception is reflec-
tive of reality. Using Home Mortgage Disclosure Act (HMDA)
data from seven diverse metropolitan areas during the period
from 2004-2008, the study concluded that African-American
borrowers are 105% and Hispanic borrowers are 78% more likely
than white borrowers to end up with a high cost mortgage when
purchasing a home2. By focusing only on the data produced by
our own institutions as opposed to aggregated
industry data, it is possible to miss the forest
for the trees and come to the conclusion
that only banks subverting fair lending
regulations are perpetrators of this type
of discrimination.

The Consumer Financial Protection Bureau (Bureau) is certainly of the opinion that discrimination is present in our industry. In recent years, enforcement actions for redlining appear to be increasing in both frequency and the dollar amount of the penalties levied. In addition, the complexity of analysis incorporated into enforcement actions of this nature by regulators (while intimidating when read from the default perspective of a compliance officer: “What if this was my bank?”) gives detailed and useful insight into the methodology used by examiners.

The highest and best use of an enforcement action against another institution is to convert the structure of allegations made by regulators into an actionable review plan as part of the Compliance Management System. Based on recent cases, regulatory enforcements have included citations reflecting risk throughout the loan process:

■ ■ ■ Market Presence and Advertising

■ ■ ■ Customer Interaction

■ ■ ■ Receipt of Applications

■ ■ ■ Underwriting and Non-Origination

■ ■ ■ Pricing and Fees
When viewed through this lens, the enforcement action be-
comes a road map to the potential exposure points for redlining
and fair lending issues throughout the loan process.

No compliance officer wants to believe that the institution they serve would even inadvertently exclude areas with a significant minority population from their lending footprint or provide higher cost mortgages to minority applicants, but taking steps to both discover and correct potential redlining will help ensure that there are no surprises in that area at the time of an examination.