Red Alert on Redlining: Renewed Attention Plus Crisis Aftermath Stir Up Major Trouble for Banks
Barefoot, Jo Ann, Sandler, Andy, ABA Banking Journal
Faced with a deluge of consumer regulations and enforcement relating to loans to unqualified borrowers, many banks are unaware of the reemerging risk of being inadequately focused on extending credit in minority communities. Lenders beware. There has been a dramatic upsurge in allegations of redlining--the failure to be equally active in offering credit in minority and nonminority communities.
Fair-lending enforcement surge
While redlining cases were once a staple of the U. S. Department of Justice (DOJ), fair-lending enforcement in recent years focused largely on pricing and reverse redlining--the steering of minority borrowers to less-favorable loan products.
Now, however, with subprime lending virtually eliminated and lenders refocused on credit quality, there are growing concerns about access to mortgage and small business credit in minority communities. This renewed redlining focus comes at a time when attention to fair-lending enforcement has dramatically increased. Almost immediately upon taking office in 2009, Attorney General Eric Holder announced that fair-lending would be an enforcement priority for the DOJ. Attorney General Holder's commitment is shared by Assistant Attorney General for Civil Rights Thomas Perez, who has had a career-long focus on fair-lending.
Under this new DOJ leadership, significant resources have been added to the Civil Rights Division Housing Section, where more than 20 lawyers focus on lending discrimination. The Housing Section has its own investigatory activity, but--importantly for banks--also receives referrals from the bank supervisory agencies. These agencies must make a referral any time they suspect a pattern or practice of discrimination under the Equal Credit Opportunity Act (ECOA) or Fair Housing Act (FHA). The Department of Housing and Urban Development (HUD) may also refer cases to DOJ for FHA violations.
Enforcement activity is surging. The banking agencies have made more than 40 fair-lending referrals over the past two years. During this period, DOJ has announced four fair-lending settlements on a variety of issues, including redlining and charging higher rates and fees on home, automobile, and retail loans to members of protected classes. Meanwhile HUD has established a special systemwide investigations unit and is pursuing a number of fair-lending investigations. All this activity is occurring even before the new, powerful Consumer Financial Protection Bureau opens its doors this summer.
Why is redlining suddenly in the spotlight? Beyond the overall political climate, regulators are concerned about the economic health of minority communities, many of which bore the brunt of the worst subprime lending abuses and continue to suffer acutely from the unemployment, financial distress, and reduction in available credit that define the Great Recession. Inner-city neighborhoods that were active subprime markets now find neither nonbank subprime lenders nor depository institutions actively serving them, according to officials. These conditions have reignited the kinds of concerns that originally produced the Community Reinvestment Act (CRA), enacted in 1977 largely in response to allegations that banks refused to lend in inner-city neighborhoods.
Caught by surprise
The increased focus on geographic distribution of lending has taken many banks by surprise. Cases vary, but a common pattern is that the redlining question is raised by regional or national agency personnel after field examiners have prepared an exam report raising no issues. Often these field reports are consistent with prior regulatory findings and based on fact patterns that are essentially unchanged. Reversing these prior findings leaves bank management blindsided by what feels like an unannounced shift in regulatory standards.
One important trigger in these cases is the bank's delineation of its CRA assessment area. …