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.
How To Identify Redlining Risk
When searching for redlining risk, it isn’t really a question of whether your institution has risk. Rather, it’s a question of how much risk you have.
If there’s diversity in your market (and nearly every market has some), then there’s inherent risk. Since you can’t control the diversity in your market, you must understand the demographic profile of the areas you serve. By understanding this profile, you can take steps to decrease risk and ensure that your institution is providing equal access to credit among all populations.
Regulators use the Interagency Fair Lending Examination Procedures to assess whether your institution is properly serving areas with high concentrations of minority residents. This is where your Reasonably Expected Market Area, or REMA, comes in. Your REMA will typically include your CRA assessment areas (AA), as well as any areas outside your AAs where your institution advertises, lends, or conducts business, or may be reasonably expected to conduct business.
That “reasonably expected” is important. Regulators carefully assess the areas right outside your lending activity to determine whether your institution has been deliberately avoiding an area, and thus redlining.
5 Steps to Find and Address Redlining Risk
1. Define and Document Your REMA
While regulators will officially define your REMA, you should spend time before your exam mapping it yourself as best you can.
Unless you know your general REMA, it’s rather difficult to make sure you’re doing a good job in those areas, isn’t it? By mapping it yourself, you can see patterns and keep a close eye on your institution’s lending activity. At a minimum, you should map:
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Where your branches are located
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Where you advertise
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Where your loans originate
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Where your community outreach efforts take place
This is your basic REMA. It may shift slightly when regulators do the official mapping, but now you have a good idea of what to expect, and this sets you up for success when moving on to the next step.
Tip: Kadince software makes it easy to map and analyze your REMA. Schedule a demo to learn more.
2. Identify Areas To Improve
Now that your REMA is mapped, you need to collect demographic data for the whole area. This will help to assess your inherent risk profile.
In the unlikely case that your REMA is 100% homogeneous, you may not need to move forward with a full redlining analysis. But in most cases, your areas will have some inherent risk, and it’s your job to understand how much and what kind.
To understand this, you should:
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Map your loans and advertising efforts
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Overlay census tracts (especially majority-minority areas)
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Identify areas where lending/advertising is missing or sparse
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Come up with a plan to serve those areas
This visual analysis can quickly reveal service gaps where your institution may be unintentionally avoiding minority neighborhoods.
By doing this now, you’re giving your institution time to correct any problems before regulators show up. Without this visual analysis, you’ll be open to penalties and other consequences when regulators find the holes you missed. Remember, redlining is redlining, even if it’s unintentional.
3. Compare Your Lending to Peers
The next step in reducing redlining risk is comparing your home mortgage lending activities to that of your peers/competitors.
You know regulators are going to do this comparison, so why not get ahead of the game so you know what to expect?
Regulators will evaluate your lending patterns by comparing them to similarly sized or similarly active lenders in the same geographic area. Typically, this means comparing your applications to institutions whose volume is 50–200% of yours in a given market, so that’s where you should start.
Here’s how this might look:
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Identify all lenders in a market area
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Filter peers based on application volume
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Include lenders with between 50% and 200% of your institution’s volume in the market. E.g., if you had 100 mortgage applications, your peer group would include lenders with 50 to 200 applications in that same area.
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Compare penetration in high-minority census tracts
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What percentage of your peer’s loans go to majority-minority neighborhoods?
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What percentage of your peer’s total applications come from those areas?
Tip: If you’re a HMDA reporter, you can find home mortgage data on the CFPB’s HMDA Data Browser. If you’re not a HMDA reporter, compare your activity to area demographic data, or typically the percentage of households in majority minority neighborhoods versus those that are not.
Once you know the numbers, you can determine if your institution is doing well or falling behind. For example, if your peers are making 30% of their loans in high-minority census tracts, but you're only at 10%, then something likely needs to change.
And it isn’t too late to close the gap. Here are some questions you might ask:
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Are their products better suited to that audience?
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Are their branches more accessible?
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Are their ads placed in the right media?
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Are they showing up in the community in meaningful ways?
Knowing what others are doing can help you refine your own outreach and product offerings. And now that you know where redlining risk exists, it’s time to move onto the why.
4. Conduct a Community Needs Assessment
Once you’ve identified potential redlining risk, the next step is to understand why this risk exists and how you can address it.
The best way to do this is by conducting a community needs assessment (CNA). This assessment helps you understand:
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What credit products your underserved communities actually need
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How they perceive your institution
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What might be creating barriers to trust or engagement
There’s no one-size-fits-all approach here, but a strong CNA typically includes:
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Focus groups or listening sessions with residents (customers and non-customers)
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Outreach to community-based organizations (churches, housing agencies, nonprofits)
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Candid feedback on past missteps or missed opportunities
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Aggregated data and trends showcasing the current outlook of your communities
Now you can decide whether your current product offerings align with the credit needs of your community and how you might adjust to better provide equal access. You may not need entirely new products—but small changes to eligibility criteria, marketing language, or delivery methods can make a big difference.
This community needs assessment is an important step in rebuilding trust and providing equal access to credit among all ethnicities. You should continue checking in with community members over time to track progress and sentiment shifts as your outreach improves.
5. Create an Action Plan and Follow Through
You’ve mapped your REMA, identified risk, compared your lending data to peer performance, and conducted a community needs assessment.
Now it’s time to put that insight into action.
Creating an official action plan shows regulators that your institution is serious about improving. They don’t expect your institution to be perfect, but they do expect progress, and they want to see that your institution is:
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Taking meaningful steps to address gaps
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Tracking and measuring performance
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Making adjustments as needed
A good action plan shows that you’re aware of risk and are actively working to reduce it. Here’s what your action plan might include, with examples:
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Clear, measurable goals
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Increasing loan volume in specific majority-minority census tracts
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Launching new mortgage or small-dollar credit products designed for underserved communities
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Hiring a certain number of bilingual staff or loan officers in key branches
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Increasing outreach partnerships or educational events in target areas
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Targeted outreach and marketing efforts
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Tailor marketing campaigns to specific communities using relevant imagery, language, and platforms
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Attend local events, sponsor community programs, or offer mobile banking units in underserved areas
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Advertise via radio, billboards, local newspapers, community influencers, etc.
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Partner with brokers, realtors, and community leaders
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Product alignment and innovation
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Adjusted underwriting criteria
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New, inclusive loan products
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Language accessibility and support
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Ongoing monitoring of lending activity and performance
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Application volume, approval rates, and lending by demographic area
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Peer performance and demographics
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Adjustments over time based on results
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Maintain records of actions taken and progress made
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Share updates with compliance, CRA committees, and senior leadership
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Be prepared to share results with regulators during exams
Yes, creating an action plan can take some time. You want to do it right, after all. But in the end, your action plan will lead to better lending, better outreach efforts, and a better institution.
Redlining is one of the most scrutinized issues in fair lending today, but when you understand it, you’ll be better able to protect your institution’s reputation, build trust, and stay ahead of regulatory risk.
To learn more about avoiding redlining risk, check out our webinar, How Inclusive Marketing Can Protect Your Institution From Redlining Risk.
*This article has been reviewed by Charles LeFevre, compliance expert and Kadince’s Director of Compliance Operations.
None of Kadince, Inc., its affiliates, or its respective employees, directors, officers, and agents (collectively, “Kadince”) are responsible or liable for any content or information incorporated herein. Read full disclosure.
