Fair Lending: Redlining In the 21st Century?

Can redlining happen in the 21st Century? According to the National Fair Housing Alliance, the answer is a resounding yes. At PCI's annual CRA and Fair Lending Colloquium, Dr. Calvin Bradford, presenting on behalf of Cathy Cloud, discussed redlining as the NFHA sees it today. Redlining, according to Cloud and Bradford, is a deliberate strategy to define geographic areas in which financial products and services will not be made available.

Redlining, no matter how you look at is, is very much a fair lending issue and must be considered in the context of fair lending. Bradford identified symptoms of redlining as: an absence of branches in the geographic area, failure to develop marketing directed at minority customers, failure to develop products appropriate for a wide range of customers, providing products on differential terms and conditions, product steering for loans in minority neighborhoods, appraisals that do not accurately reflect the property value of the area, under-representation of minority applicants in the loan pool, and differential loan origination rates by demographics and geographics.

Branch locations have everything to do with how easy or difficult it is to stop by the bank and file an application for credit. If going to the bank means making a special trip - with time off from work - the simple act of obtaining credit is more costly than for the person who can stop by the branch on their way home.

Whether branches are convenient or not, the marketing of products says a great deal to the potential customer. Marketing is designed to speak to the customer. If your products aren't speaking to all potential customers, including minority groups, your marketing may not pass the fair lending test. Marketing is your message. Make sure that it is delivered properly.

Product design and product choice is a classic fair lending and CRA issue. These concerns should come as no surprise. However, when did you last look carefully at appraisals to see how property in the neighborhood was selected for value and comparables? The standard - and easy - way to develop comparables is to identify recent sales. However, in older neighborhoods where turnover is less frequent but improvements are common, the sales technique may not be the best method for finding good comparables. In older neighborhoods, many houses have been improved, often by significantly increasing the size or by modernizing amenities. Find out whether your appraisers are taking these improvements into account. Failure to do so can result in undervalued appraisals - another form of redlining.

These symptoms or measurements of redlining are not new. In fact, they were the symptoms more than 25 years ago. Unfortunately, they still exist. Discrimination may be subtle but it still exists. According to a HUD study conducted in 2002, there is often less coaching or help given to minority applicants. There tends to be a take-it-or- leave-it attitude while non-minority customers get attention. The study also found that lenders tended to steer minorities to FHA loans rather than conventional loans. The result of these actions is that fewer minorities succeed in getting approved for conventional loans. The differences can be measured by loan product, by race or ethnicity, by price, and by location.

In its research, the NFHA found continued evidence of discrimination and redlining. Product steering was not unusual to find. The organization also finds differences in how lenders within a company apply company policy and underwriting. Differences can also be measured by customer service - how willing employees are to work with minorities and how hard they work for them.

What this means for financial institutions is that, in spite of the attention being given to newer issues such as predatory lending, the classic fair lending concerns are very much alive. A self-assessment that gives attention only to practices that could be considered predatory may fail to identify more traditional concerns of geographic-based disparities in lending. A robust fair lending self assessment program must continue to give close attention to all aspects of lending discrimination.

ACTION STEPS

Use your HMDA and CRA reports to measure geographic distribution of loan products. Look for any patterns that indicate under-representation in your market.
Do a rate and price analysis by demographics and geographics of recent loan decisions and look for any pattern that may indicate discrimination.
Look at a map of your branches in the context of low and moderate income areas to determine whether you have adequate presence in all parts of your market.
Compare the services available in branch offices, if not all branches are full service. Look for any patterns that could indicate discrimination.
Compare branch locations to living, working and commuting patterns in your assessment area.
Review appraisals to see how properties are valued. Look especially for treatment given to home improvements in the neighborhood.