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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
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