Market Presence and Advertising
An end-to-end review for potential redlining begins by looking
critically at the decisions your institution has made relative to
branch locations. The collection of branches operated by a bank
is dependent on many factors; original market area, transaction
volume over time, acquisitions and more can affect the physical
footprint of the institution. No matter the reason for the locations
of your brick and mortar facilities, it is important to understand
how those particular locations relate to the demographic makeup
of the community itself. If the census tracts that make up the larger
community in which the bank operates, contain some areas where
the majority of the population is made up of individuals with a
minority status, but your branches are located only or primarily
in census tracts with a majority white population, this can provide
the foundation for a redlining case. The fact that banks’ strategies may include both “old” and “new” branches over time with
demographic changes within the community that may or may not
align with that strategy, can make this analysis a daunting task.
It can be tempting to leverage the bank’s existing Community
Reinvestment Act (CRA) Assessment Area in the initial stages
of a redlining review, as regulators use the bank’s determination
of the areas it serves in evaluating compliance with the CRA.
However, recent enforcement actions for redlining have faulted
the subject financial institution for the exclusion of higher minority populated areas from the assessment area itself. In this
way, a review limited to the assessment area does not provide a
wide enough perspective from which to view the context of the
bank’s physical locations. Look at the census tracts adjacent to
the assessment area for your bank. If the demographic data for
those census tracts shows significantly higher concentrations of
minorities than those tracts scoped into the assessment area, this
may be an indication that your branch locations present redlining
risk. If possible, document any business reasons your bank may
have for excluding these adjacent tracts from the assessment area.
If the remainder of your review indicates that the institution has
comparable rates of application and origination for minority borrowers in nearby areas as compared to peer data, branch location
alone will likely not cause an examination finding.
Furthermore, a regulator-hosted Outlook Live webinar in Oc-
tober 2016 included reference to the Reasonably Expected Market
Area (REMA), which is a zone determined by examiners to be the
area in which the bank is reasonably expected to have marketed
its services and provided credit. This emerging term is described
by regulators to be the basis for defining redlining risk during an
examination, and it was noted that the REMA may expand beyond
the boundaries of a bank’s CRA Assessment Area. The REMA is
arrived at through analysis of the bank’s branches, marketing efforts,
mortgage broker service area, customer locations and other aspects
of the bank’s activities and geographic location3. The goal is then
to compare the REMA to actual marketing and lending activities
by the bank and determine if there are any areas (especially those
with a significant minority population) in which the bank should
be lending and advertising more than it is currently. It’s easy to see
that the past view of redlining has morphed in the present view.
In addition to the physical locations of the bank’s branches, the
location and content of any marketing used by your institution
should be reviewed. If images of human beings appear in the
marketing, do those human beings reflect an inclusive approach by
the bank, representing the diverse communities in which the bank
conducts business? If the institution utilizes direct mail marketing
campaigns, how does the distribution of that marketing overlap
with the branch footprint and the demographic makeup of the
community’s neighborhoods?
Customer Interaction
While the fairness and equitability of customer interactions has
long been a part of the way we think about fair lending, the level of
scrutiny afforded these exchanges by examiners has been ancillary
to the data analysis conducted during an examination. A particular
action levied in 2016, however, appears to be one of the first in which
the legal complaint filed by regulators included allegations of unfair
treatment of customers on the basis of the agency’s use of matched-pair testers. Generally, when we think about matched-pair testing, it
is an analysis of two different loan transactions for borrowers with a
similar financial profile and different demographic backgrounds. In
this case, “matched-pair tester” refers to the deployment by regulators of mystery shoppers of different racial backgrounds to inquire
about mortgage products and services. It appears that the use of
“matched-pair testers” in this case was driven (at least in part) by
the results of a redlining analysis.
In a recent consent order, the regulator described how it supplied two testers—one white and one African-American, with false
financial profiles (the African-American tester having a slightly
more favorable profile)—that were sent into several offices to
inquire about underwriting requirements and loan programs for
which they may have been eligible. Each tester spoke with the
same loan officer at each location, with the conversations occurring about a week apart. The differences in the interactions were
then incorporated into the legal complaint as further evidence of
discrimination. The granularity of the analysis of the matched-pair
tester communications shows that where much of the fair lending
risk associated with conversations between a consumer and a loan
officer (until more recently) has been primarily managed through
consumer complaints, direct examination risk is now present
In addition to the physical locations of the
bank’s branches, the location and content
of any marketing used by your institution
should be reviewed.
