The 5 Fair Lending Risk Factors Outlined by the Federal Reserve for 2018
On July 26, 2018, the Federal Reserve published its new Consumer Compliance Supervision Bulletin to highlight current issues and share examiners’ observations. At the top of the list was redlining. The fact that redlining was listed first, shows it remains a key concern among regulators.
The Federal Reserve Board outlined the following 5 risk factors it considers in a redlining review:
- Community Reinvestment Act (CRA) Assessment Area
- Examiners will review the bank’s assessment area to ensure majority-minority census tracts are not excluded.
- Lending Record
- Examiners will analyze the bank's mortgage lending (HMDA) and/or CRA small business lending data to uncover any statistically significant disparities in majority-minority census tracts when compared with similar lenders.
- Branching Strategy
- Your branch location matters. Examiners will review whether the bank’s branch or loan production office locations appear to exclude majority-minority census tracts.
- It is important to analyze a branch, ATM and LPO’s impact on your assessment area by utilizing available mapping software.
- Marketing and Outreach Strategy
- Examiners will review whether your marketing and outreach strategy treats majority-minority census tracts less favorably.
- Examiners will review whether any complaints by consumers or advocates raise concerns about treating certain geographies differently on a prohibited basis.
Banks should also ensure they are accurately geocoding their lending activity and using market data for peer comparison and performance context. Managing risk is an important part of any compliance program. The best way to manage redlining risk is to analyze disparities in applications and originations and document business decisions for exceptions.
The Federal Reserve advises banks to manage risks by:
- Regularly reviewing assessment areas and credit market areas, especially when there is a change in business model or through a merger/acquisition.
- Monitoring marketing activities to ensure all of the assessment area is reached.
- Monitoring complaints to identify trends that indicate redlining risk.