No bank or credit union wants to be accused of redlining. Beyond the serious compliance implications, redlining can damage your institution’s reputation and weaken community trust.
But most compliance professionals think that finding and addressing redlining risk is challenging and time-consuming.
Good news: identifying redlining risk really isn’t as difficult as you may think. In five simple steps, you can find risk, compare your institution to your peers, and create an action plan to mitigate that risk. But first, what does redlining even mean?
What Is Redlining?
From a fair lending standpoint, redlining is the practice of denying or limiting credit access in neighborhoods with large minority populations. While redlining can technically occur under the Community Reinvestment Act (CRA), the analysis of redlining risk actually falls under the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. As these laws are focused on preventing discrimination based on prohibited bases, redlining analyses are generally focused on race and ethnicity, and not on income level like the CRA.
How Redlining Began
The term “redlining” originates from the 1930s, when the Home Owners’ Loan Corporation (HOLC) created literal maps to assess the risk of mortgage lending in different neighborhoods. These maps color coded neighborhoods by risk level: green for “best,” blue for “still desirable,” yellow for “definitely declining,” and red for “hazardous.”
Unfortunately, these “hazardous” areas were defined primarily by race. Areas with Black or mixed-race populations were marked in red, effectively cutting them off from homeownership opportunities for generations. These discriminatory practices laid the foundation for the inequalities we still see today.
The Demographics Are Changing
Fast forward nearly 100 years, and American communities look very different than they once did. According to U.S. Census projections, by 2050, the majority of the U.S. population will be people of color. Banks and credit unions must be prepared to serve diverse, multicultural, and multilingual markets. As the minority population grows, institutions that actively practice redlining and discrimination become more obvious.
The Penalties of Redlining
The Department of Justice (DOJ) takes redlining very seriously. If your institution isn’t compliant, you may be subject to substantial fines and other penalties, not to mention suffer serious reputational damage and regulatory restrictions.
A recent consent order from the DOJ ordered a credit union with $6 billion in assets to pay $6 million in loan subsidies, $250,000 in community partnerships, and $270,000 in advertising. These penalties are meant to remediate harm, but it’s difficult to regain a community’s trust after so clearly going against it.
The DOJ also requires penalized institutions to submit a detailed remediation plan addressing how it plans to change. These changes often include:
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Establishing or expanding branches in minority neighborhoods
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Offering loan subsidies or discounted products in redlined areas
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Funding outreach and marketing in those communities
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Training staff on fair lending practices
After a redlining accusation, the DOJ may carefully monitor your institution’s lending practices and marketing efforts for several years. You may even be limited on mergers, acquisitions, or branch expansions until cleared.
Rather than risking penalties and reputation damage (which can take years to rebuild), you should always remain compliant and do everything you can to avoid redlining. Your institution—and your community—will be better off for it. And once you know what to watch for and how to address redlining risk, staying compliant really isn’t that difficult.
