April 6, 2024 / VOLUME NO. 308

More Scrutiny on Redlining

In 2023, six banks settled with the U.S. Department of Justice for redlining violations — allegedly discriminating against predominantly minority neighborhoods in their markets, a practice prohibited under fair lending laws.

That number may not seem like much, but it represents a significant uptick in activity. In 2021 and 2022, the agency settled with just three banks and one mortgage lender, according to a Bank Director analysis. 

Since launching its Combating Redlining Initiative with the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau in late 2021, the Justice Department has settled with 12 lenders for $122 million, which will fund loan subsidies and other support for majority Black and Hispanic communities. Those orders carried additional requirements as well, such as opening branches and adding loan officers in the affected areas.

Federal bank regulators refer fair lending matters to the Justice Department for further investigation, but that doesn’t mean that the regulators won’t scrutinize a bank on their own, says Abigail Lyle, a partner at Hunton Andrews Kurth. Redlining could be flagged as a Matter Requiring Attention (MRA) in exam findings, or regulators could issue a consent order or assess a civil money penalty. 

With examiners playing an integral role in detecting redlining violations, it’s important to understand what will grab their attention. In a recent report, the Federal Deposit Insurance Corp. pointed to one culprit: misunderstanding how regulators view the bank’s market.

Examiners analyze a bank’s “reasonably expected market area,” or REMA, to sniff out redlining violations. That’s often not the same as the market area the bank has selected for Community Reinvestment Act compliance. 

A redlining analysis will look at a broader geographic footprint and compare the bank’s lending penetration in majority-minority areas compared to peer institutions, explains Lyle. Regulators will look for holes in the bank’s market area, or whether branches are primarily located in predominantly white neighborhoods. “That's where there's the issue with the CRA,” she says. “You might have branches in [low- to moderate-income] locations, but those might not be majority-minority census tracts.”

She recommends that banks appoint a fair lending officer, rather than relying on the CRA officer, and beef up redlining training. Legal counsel can also help banks leverage Home Mortgage Disclosure Act data to identify gaps before regulators do.   

Often, redlining violations are acts of omission rather than overt acts of discrimination. But that doesn’t mean regulators take them less seriously.

“Redlining does not necessarily involve the complete avoidance of an area,” according to the FDIC’s Consumer Compliance Supervisory Highlights, released in March. “The redlining issues that the FDIC identified in 2023 were generally the result of branching activity that did not include majority-minority areas and limited marketing and outreach in those areas.” 


• Emily McCormick, vice president of editorial & research for Bank Director

The Roadblock Facing AI Use at Banks

Stronger data management strategies will help community banks leverage artificial intelligence in their institution, according to a recent research report from Bank Director. 

“There are going to be some areas in community banks where you can start using AI on subsets of the data and build real capabilities. It’s just [that] the better the data is, the more you can get out of it.” — Alexandra Mousavizadeh, Evident

• Kiah Lau Haslett, banking & fintech editor at Bank Director

Winning the Quest for Deposits With a Side Brand

Using the most cost-effective approach, a digital bank brand can help banks win deposits quickly.

What to Do to Address Rising Consumer Delinquency

By prioritizing efficient operations and adopting innovative solutions, banks can guide customers through financial uncertainty while mitigating internal obstacles.

Beyond Interest Rates: Five Strategies to Attract and Retain Deposits

Focusing on relationship building, innovative services and customer-centric incentives can help community banks remain competitive in the war for deposits.

Its Numbers Declining, the Branch Is Undergoing a Remake

Net branch closures continued in 2023, but the pace is slowing as banks rethink the purpose and value of a physical presence.