Redlining: The King of All Fair Lending Risks

If you think redlining is just a Community Reinvestment Act problem, nothing could be further from the truth. While there is some crossover, redlining is very much a core fair lending problem. In its simplest form, redlining is when a lender simply doesn’t make loans in certain parts of your community, and it’s nearly always based on some prohibited basis characteristic of the neighborhood. In other words, a lender isn’t making loans typically in higher-minority areas.

Redlining is an old problem. You may be shocked to learn that our own government not only sanctioned redlining but mandated it for many years. In fact, the FHA and later the VA wouldn’t guarantee mortgages to minority individuals or in minority areas for many years. In the 1960s, the Fair Housing Act finally came along and made these practices illegal. Problem solved, right? Wrong! Redlining still happens, it’s just not as open and blatant as it once was. Since our communities have been segregated for so long, it’s not that easy to just reverse the effects of redlining. We can’t just pick up generations of families and integrate them into different parts of the communities. However, we can make sure that credit is available so people can choose to live where they want. So how do we spot redlining, and how do we prevent it in 2023?

Here are five things every credit union needs to know to identify and prevent redlining risk:

1. Know your branches. You need to plot your branches on a map and see where they are located. Lay those branches over a map of your community’s demographics. Identify the high-minority areas and see if your branches are in or around those areas. For decades, lenders would strategically place branches far away from high-minority areas. Since branches don’t magically get up and move, they likely still show these lasting effects. Know your branch locations and when it comes time to plan a new location, use that information in your strategic planning. If your branches clearly avoid high-minority areas, it would be wise to look for opportunities to start correcting that when you open the next one.

2. Know your loans. Just as you plot your branches on a map, you should also plot your loans. You need to know where you are lending and just as importantly where you are not. If you have fair lending software, this can be quite easy. If you are a HMDA reporter, you already have all of the data. You can also do the same for regular consumer loans if you know the member’s address.

What you are looking for is gaps in your lending. Are you lending around high-minority areas but typically not in them? Plotting loans on a map is such a great visual representation that helps everyone easily see the problem. People get lost in numbers, ratios and tables, but everyone recognizes colors on a map. Humans can easily see patterns, and we can clearly see holes in patterns.

3. Know your applications. Similar to loans, you also want to know where you are getting applications. If your lending penetration in higher minority areas is low, you need to see if you are even getting applications from those areas. That can also be accomplished with HMDA data and fair lending software. If you are getting applications from high-minority areas but not making loans, now you have to look at potential underwriting issues. If you are not making loans but also find you’re not even getting applications, now you are getting closer to the root cause. People are simply not applying. You don’t need to be a fair lending expert to know that you can’t make loans to individuals who don’t apply. So, what do you do if you find you are not getting any applications from high minority areas?

4. Know your marketing. Every credit union needs to know where they are marketing, and just as much so, where they are not marketing. Sometimes you have to sit down with the marketing team and ask simple questions, such as, where are we sending marketing materials? If you target markets online, you need to know how you choose who sees those ads. If you market online, and you target areas only five miles around your branch locations, guess which areas the credit union will sign up new members from? You pair that with the fact that the branches are only in low-minority neighborhoods – now guess who is going to apply for loans at the credit union? They’re separate issues, but they are all interconnected. Understanding your marketing efforts and deliberately marketing in high minority areas can be a great way to expand and reach those members and potential members. It’s also naïve to think that someone will drive 30 minutes out of their way and pass five different lenders on the way to your location because that’s the closest to their home. Marketing doesn’t cure everything. You still need to be accessible, and technology can also help with that, but marketing can help as well. You need to truly understand your current efforts.

5. Act. What happens if you go through these steps and you find unfavorable results? You need to act! Fair lending problems are like milk and fish – they certainly don’t get better with age. One of the best and most cost-effective ways to reach high-minority communities is through community connections. Finding that right community member or group to partner with can be a very effective way to penetrate a new market. These can include non-profit groups, affordable housing organizations, or other groups that promote equity and inclusion. Being part of the solution and working with communities to make credit available is an excellent way to reach members you haven’t in the past.

Fair lending doesn’t have to be difficult. Building strong policies and procedures up front is the best way to start building a fair lending program. However, actually following those policies and procedures is just as critical. Every credit union should be doing some basic testing, monitoring and auditing to ensure your program is free from discrimination.

Tory Haggerty, based in Sioux Falls, S.D., is a former FDIC examiner, the author of “Unfair Lending: Why Discrimination in Banking Still Exists and How to Prevent It,” the president/owner of community bank compliance consulting firm Tuscan Club Consulting and the president/owner of fair lending school Tuscan Club University.