The Fair Housing Act (FHA) was adopted years ago to promote equal access to mortgage credit. To that end, the FHA prohibited a practice called "redlining," which occurred when financial institutions drew lines on maps around minority neighborhoods and made conscious decisions not to lend to borrowers living within those boundaries. After so many years, many thought that redlining was a thing of the past as well as predominantly an issue limited to banks. Unfortunately, it appears redlining issues may be arising again, and it would be wise for credit unions, especially those with broader fields of membership, to be mindful of the regulatory requirements and to have strong policies and internal controls in place.
During the mortgage lending heydays prior to 2008, many mortgage lenders were aggressively marketing and originating mortgage loans in minority neighborhoods at often much higher interest rates. However, with the economic downturn and heightened regulatory focus on applicants' ability to repay, mortgage lenders have generally adopted much more conservative underwriting practices. In addition, the data show that mortgage foreclosures more adversely affected minority neighborhoods than nonminority neighborhoods. It appears now that these and other factors have led some mortgage lenders to adopt marketing and lending practices designed to exclude borrowers in geographic areas that the lenders believe represent an unacceptable level of risk. Thus, redlining may once again be rearing its ugly head.
Case in point: the New York Attorney General's Office recently filed suit against Evans Bancorp, Inc. and Evans Bank in Buffalo, N.Y., alleging that the bank has engaged in redlining from 2009 to the present by denying credit to African-American applicants living in East Buffalo, a predominately African-American community.
Specifically, the attorney general has cited a map used by the bank that showed lines drawn around the bank's trade areas where it would offer its mortgage products and services. These trade areas exclude all of the predominately African-American neighborhoods in the Buffalo metropolitan area. A copy of the map is actually appended to the suit documents. In addition, the suit alleges that Evans Bank advertised its mortgage products in newspapers that were not circulated in the African-American communities.
The evidence against Evans Bank appears daunting, particularly in light of the access to HMDA data that regulators and attorneys general now have in their arsenal. Where once regulators had to rely mainly on anecdotal evidence to trigger an investigation, sophisticated software programs can now analyze the expanded HMDA data to identify outlier institutions whose lending practices deviate from the norm of other lenders in the same geographic area. In the case of Evans Bank, the HMDA data show that other banks in Buffalo were actively making mortgage loans to applicants in the East Buffalo area during this same time frame, indicating that the area has eligible borrowers who need and qualify for mortgage services.
This enhanced access to and use of HMDA data has identified other potential discriminatory practices. It has also led to allegations and, in some cases actions, against other mortgage lenders, such as Wells Fargo, JPMorgan Chase, and Bank of America. In some situations, lenders have been accused of reverse redlining, where applicants from minority neighborhoods were approved for mortgage loans after having been steered to higher-rate mortgage products, even though they qualified for lower-rate products.
Regardless of how the facts come to light, redlining is morally wrong, a bad business practice, and not an activity engaged in by the majority of lenders. Still, all institutions — including credit unions — must be vigilant in guarding against unintended consequences. Financial institutions must be proactive in evaluating and analyzing their HMDA data, annually reviewing lending policies and procedures, performing second reviews of marketing and advertising materials and, when warranted, engaging an independent party to perform a comprehensive fair lending risk assessment or compliance review.
Jane Pannier is senior vice president and in-house counsel of AffirmX LLC. She is the former CEO of REALTORS® FCU and also previously served as senior compliance counsel and director of regulatory compliance for the NAFCU.
