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- Hi, I'm Stephanie Ovington.
In this module, Barbara Redditt, Jeff Tate, and I
will continue the discussion of fair lending risk indicators.
Before we begin, let's recap our discussion
from Part I where we discussed overt indicators,
as well as underwriting and pricing risk
indicators and strategies for mitigating those risks.
These areas are where potential fair lending risk
may be evident in a bank.
In Part II, we'll focus our discussion
on other areas to consider when determining fair lending risks:
Redlining, Steering, and Marketing.
Let's begin with Redlining.
Redlining is a form of illegal discrimination
in which a bank provides unequal access to credit,
or unequal terms of credit on a prohibited basis
based on the location of the applicant's residence.
It may also include "reverse redlining,"
which is the practice of targeting certain borrowers
or areas with less advantageous products or services
based on prohibited characteristics.
Redlining can be based on overt or comparative evidence.
Overt evidence includes explicit or implied
oral or written statements
that reference a prohibited basis.
It also includes terms and geographical references
used by a bank that would,
to a reasonable person familiar with the community,
mean a specific prohibited characteristic.
For example, if the principal information
conveyed by the phrase "north of 110th Street"
is that the indicated area
is principally occupied by Hispanics,
then a policy of not making credit available
"north of 110th Street"
is overt evidence of potential redlining
on the basis of national origin.
Overt evidence is relatively uncommon.
Consequently, the redlining analysis
usually will focus on comparative evidence
in which the bank's treatment of areas
with contrasting racial, national origin, age,
or other prohibited characteristics is compared.
The most common redlining analysis
is based on race or national origin,
where differences in lending and marketing
are observed in minority areas,
which are areas with a high concentration of residents
of a particular race or national origin.
The same analysis could be adapted
to evaluate relative access to credit
for areas of geographical concentration
on other prohibited bases.
It's important to note that redlining
does not necessarily mean the total absence of lending
within minority areas.
It can also be identified
when a bank's lending level in minority areas
is not comparable with lending levels
in non-minority areas,
especially when factors such as competition,
demographics, and economic conditions are considered.
Some of the more common risk indicators for redlining are:
1) A lack of applications from or lending in minority areas;
2) Disproportionately high denial rates
for applicants located in minority areas;
3) Arbitrary exclusion of minority areas
from the bank's market area or Community 1 Reinvestment Act
or CRA assessment area;
4) Differences in services or hours of operation
at branches in minority versus non-minority areas;
and 5) A lack of branches in minority areas.
Jeff will now share
some examples of potential redlining concerns.
- Consider this example
of potential redlining concern.
Upon review of the bank's HMDA data,
the compliance officer noticed
that the bank has a low percentage
of home mortgage applications from the minority tracts
within its assessment area
when compared to demographic data and lenders
with similar lending characteristics.
Here's another example: A bank's products, services,
or hours of operation vary by branch location.
If these differences have a negative impact
on predominantly minority areas, redlining may have occurred.
For instance, if a bank has a mortgage loan officer
at each branch in non-minority areas,
but does not have a mortgage loan officer
at branches in minority areas,
the bank's redlining risk is heightened.
Again, it's important to note that redlining
is not necessarily a complete absence of lending
in minority areas.
It can also be found where a bank has provided
disproportionately lower levels of lending or banking services
to minority neighborhoods.
Barbara, can you provide
some strategies that can help mitigate redlining risk?
- Sure. Some strategies for mitigating redlining risk
include the following:
1. First, define the bank's market areas
based on legitimate business reasons.
The bank's market areas or CRA assessment areas
should be reviewed by the Board of Directors
to ensure that minority areas are not arbitrarily excluded.
The designated market or CRA assessment areas
should be based on sound economic factors.
2. Second, monitor loan activity
by the racial composition of census tracts
to detect possible discriminatory trends.
Bank management should periodically review
any available loan data,
such as HMDA data and CRA small business loan data,
to evaluate how well the bank is serving minority areas.
The analysis should determine if significant discrepancies
exist between non-minority and minority areas,
in loans originations, approval and denial rates,
or rates of denials due to insufficient collateral.
A similar analysis can be performed for non-HMDA loans
by reviewing the geographic distribution
of consumer and business loans.
The bank's performance should be compared
to any available aggregate lending or demographic data.
3. A third strategy to mitigate redlining risk
is to ensure that marketing efforts
encompass the entire market area.
Management should ensure that media outlets
reach minority areas.
4. Finally, ensure that differences
in products, hours, and services
between branches located in minority areas
versus non-minority areas
are due to legitimate business reasons.
- Thank you, Barbara,
for sharing those helpful strategies.
A key fact to remember:
Barbara will now discuss risk indicators
related to steering.
- Steering is another
fair lending risk factor to consider.
The distinction between illegal steering and guiding applicants
toward a specific product, feature, or lending channel
centers on whether the bank did so on a prohibited basis,
rather than based on the applicant's needs
or other legitimate factors.
When banks have multiple lending channels available
to customers (for instance, both retail "in-house" home loans
and secondary market home loans),
they should advise potential applicants of all options
and explain the advantages and disadvantages of each.
Guiding potential applicants to an affiliate lending division
should be based on nondiscriminatory criteria,
such as the availability and types of loan products
best suited to the customers' needs.
Ultimately, the applicants should select
the loan channel and product.
Some common risk indicators related to steering are:
1) A lack of clear, objective, and consistently implemented
standards for:
a. Referring applicants to subsidiaries, affiliates,
or lending channels within the bank;
b. Classifying applicants as "prime"
or "sub-prime" borrowers;
or c. Deciding what kinds of alternative loan products
should be offered or recommended to applicants.
2) For banks that offer different lending products
based on credit risk or that offer similar lending products
through multiple lending channels,
steering risks include:
a. Offering financial incentives for loan officers or brokers
to place applicants in nontraditional
or higher-cost products;
b. Significant differences in the percentages of prohibited
basis groups in each of the alternative loan products;
or c. Significant differences in the percentages
of prohibited basis applicants in one of the lending channels
when compared to that of another lending channel.
Now that we've identified some risk indicators for Steering,
let's take a look at some specific examples.
Jeff, will you discuss some examples of steering risk?
- Yes.
In the first example, a bank offers mortgage loans in-house
and through its secondary market lending department.
A review of the bank's mortgage loans
indicates that Hispanic borrowers
received a disproportionately higher number of mortgage loans
from in-house
than the secondary market lending department
although they qualified for secondary market loans.
A discussion with management indicated that the bank
did not have any procedures for informing applicants
of the various products in the different lending units.
In the next example,
a bank offers prime and subprime automobile loans.
A review of recent lending activity indicates
that a much higher percentage of the subprime automobile loans
were originated to female borrowers
when compared to male borrowers.
In both of these examples, significant differences
in the percentage of prohibited basis group applicants
in one lending channel and loan product
over another indicates increased steering risk.
This is not proof that steering occurred,
but further analysis is warranted.
- Thank you, Jeff, for those examples.
You may be wondering what steps a bank can take
to mitigate steering risks.
Stephanie, can you share some effective strategies
for mitigating steering risk?
- Yes, some effective strategies include the following:
1) Establish clear and objective standards
for referring applicants to subsidiaries, affiliates,
or other lending channels;
2) Ensure that loan officers inform applicants
about the bank's available products
and that consumers decide which options are best
given their circumstances;
3) Review and monitor the distribution of loans
by lending channel or product
to detect any significant difference in the percentage
of prohibited basis applicants in one of the lending channels
or loan products when compared to the percentage
of non-prohibited basis applicants; and
4) Finally, review loan officer compensation agreements.
Agreements that provide incentives for loan officers
to direct applicants to one lending channel or product
over another increases steering risk.
- Thank you, Stephanie.
Banks should have a process in place
to ensure that applicants select the loan channels and products
that best suit their needs and qualifications.
Jeff will now discuss risk indicators
related to marketing.
- Another area that may pose fair lending risk
is a bank's marketing practices.
It is important to note that marketing
is not just limited to television, radio,
or print advertisements.
Marketing involves all the avenues that banks use
to reach prospective applicants,
such as loan officer call programs,
direct mail campaigns, and word-of-mouth.
Fair lending risk indicators can be present
within each of these types of marketing.
Some common marketing risk indicators are:
1) Advertising methods that discourage individuals
on a prohibited basis from applying for loans;
2) Advertising only in media that serves non-minority areas
within the bank's market area; and
3) Significantly lower levels of applications
from prohibited basis groups than their representation
in the total population of the bank's market area.
Let's look at some specific examples:
In the first example,
a majority of the bank's advertisements
include images of people that are not reflective
of the population within the bank's market area.
Advertisements that contain human images
should be reflective of the bank's market area.
Marketing that does not reflect the diversity of the community
may discourage a particular prohibited basis group
from applying for credit
or establishing a relationship with the bank.
Another example would be a bank that has
a disproportionately low level of applications
from a particular group of the population
compared to the demographics of the lending area.
Let's assume that Asians represent 20 percent
of the population in the market area,
but a bank's application rate from Asians is only 2 percent.
This could be an indication that the bank's marketing efforts
are not effectively reaching the Asian community.
Barbara, how can banks mitigate marketing risks?
- The following strategies may be helpful:
1) Review marketing efforts to ensure they do not exclude
specific regions or geographies within the bank's market areas
or CRA assessment areas where there are high percentages
of prohibited basis groups.
2) Also, review loan application distributions
to determine whether patterns exist
that raise marketing concerns.
3) If a bank is a HMDA reporter, review the distribution
of applications by race, gender, ethnicity, or location.
Compare the application rates for each group
to the demographics of the lending area.
If significant differences are noted,
this might be an indication that marketing efforts
need to be revised or enhanced.
- Thank you, Barbara, for sharing those strategies.
A bank's marketing efforts should encompass
all segments of its market area.
To summarize this module,
Redlining, Steering, and Marketing
are additional areas where fair lending risk
may be present in a bank.
Redlining does not necessarily mean
a total absence of lending in minority areas
but a lack of lending when compared to factors
such as demographics, competition,
and economic conditions.
With regard to Steering,
guiding potential applicants to a lending channel or product
should be based on nondiscriminatory criteria,
such as the availability and the types of loan products
best suited to the customers' needs.
Ultimately, the applicants should select the loan channels
and products that best suit their needs and qualifications.
And, finally the bank's marketing efforts
should encompass the bank's entire market area.
As we conclude this discussion on fair lending risk indicators,
we would like to provide you with an additional thought.
Management should consider complaints
when reviewing the risk areas discussed in this segment.
Banks should have procedures in place to address complaints,
including the designation of individuals or departments
responsible for handling them.
Bank management should be particularly alert
to any complaints that allege discrimination.
We hope this discussion of fair lending risk indicators
has been helpful.