The concept of “redlining” as a form of illegal discrimination has been around for at least 30 years. Redlining is a form of illegal disparate treatment based on geography. Consumers receive unequal access to credit or receive credit on unequal terms due to the demographic characteristics of a geographic area — the neighborhood either where they live or where the security property is located.

The Department of Justice (DOJ) and banking regulators have alleged that lenders involved in these enforcement actions redlined majority-minority neighborhoods through their marketing, sales and hiring actions. The lender’s actions discouraged prospective applicants from applying for mortgage and refinance loans in a particular area’s majority-minority neighborhoods, in violation, in some combination, of the Fair Housing Act (FHA), Equal Credit Opportunity Act (ECOA), Regulation B and the Consumer Financial Protection Act of 2010 (CFPA).

These enforcement actions have been comprised of settlement agreements to resolve allegations of lending discrimination by redlining detailed in complaints filed in courts.

New Initiative

The DOJ recently announced the start of its new Combatting Redlining Initiative. The new initiative represents the DOJ’s most aggressive and coordinated enforcement effort to address redlining.

This initiative will be led by the Housing and Civil Enforcement Section in the DOJ Civil Rights Division and will work in partnership with U.S. Attorney’s Offices. It will build on the longstanding work by the division that seeks to make mortgage credit and homeownership accessible to all Americans on the same terms, regardless of race or national origin and regardless of the neighborhood where they live.

Allegations

Typically, redlining complaints have alleged that the lender involved in the action took some combination of the following actions:

• Avoided locating branches or other offices in majority-minority areas within the financial institution’s market area.
• Avoided serving the credit needs of borrowers in majority-minority census tracts, or borrowers seeking credit in those tracts, from obtaining mortgage (or other) loans while acting to serve the credit needs for mortgage loans in majority-white census tracts.
• Engaged in discriminatory conduct that would discourage loan applications from prospective applicants who are residents of or seeking credit in majority-minority census tracts in the geographic area.
• Used a compensation policy that contains disincentives to make loans in majority-minority areas.
• Adopted and maintained internal fair-lending policies and procedures that are inadequate to ensure that the bank provides equal access to credit to majority-minority communities.
• Employed few (if any) minority loan officers/originators.
• Failed to use advertising media that are directed toward or oriented to a majority-minority community.
• Avoided sending loan officers to market to majority-minority neighborhoods.
• Developed marketing campaigns and advertisements that discouraged and ignored minority mortgage loan applicants, particularly by use of individuals pictured in marketing materials — both models and financial institution employees — that appear to be white.
• Distributed racist language and messages about certain neighborhoods — e.g., emails containing racial slurs and racist content, using racist tropes and terms, pejorative content specifically related to real estate properties’ locations and appraisals, and/or targeting people living in majority-minority neighborhoods.

Settlements

The settlements of redlining cases have included some combination of the following remedial actions that the involved financial institutions commit to undertake:

• Operate in compliance with the FHA and the ECOA and not engage in redlining or any other acts or practices that discriminate on the basis of race, color, national origin or any other “prohibited basis” in violation of the FHA or ECOA.
• Invest a prescribed amount of money in the areas allegedly redlined for special mortgage loans, usually at favorable terms and often in conjunction with some loan subsidy fund and/or grants to be applied toward downpayments and closing costs.
• Open branches/offices in the allegedly redlined area and maintain full-time mortgage lending personnel to serve the area.
• Advertise bank services in the areas involved and target sales calls to real estate professionals serving those areas.
• Continue to assess the credit needs and lending opportunities in majority-minority census tracts in the area involved on an ongoing basis.
• Meet annually with community partners, government officials, real estate agents and brokers, among others, to understand the credit needs of the majority-minority communities in the target area.
• Initiate/continue efforts to recruit minority individuals for employment in management and loan production positions.
• Adopt/employ/maintain fair lending compliance management programs, policies and practices.
• Develop and deliver fair-lending training on the financial institution’s obligations under ECOA, Regulation B and the FHA, as well as the settlement with the DOJ to relevant bank staff and officials.
• Designate a qualified, full-time employee to direct community lending, particularly targeting the formerly redlined area.
• Partner with one or more community-based or governmental organizations that provide the residents of majority-minority census tracts in the affected area with services related to credit, consumer financial education, homeownership and foreclosure prevention.
• Submit regular reports to the government agencies involved in the settlement to memorialize its efforts to assess community needs and comply with the terms of the agreement.

Avoiding Redlining Problems

Generally, no financial institution would want to intentionally discriminate against members of its community through redlining or any other means. One way to avoid such situations is to survey the list of alleged wrongdoings above and ensure that your financial institution is not falling into one or more of these practices.

Additional steps a financial institution can take to avoid redlining problems include the following:

• Examine your institution’s Home Mortgage Disclosure Act (HMDA), if applicable, and other lending data.
• Evaluate your geographic and racial lending patterns in light of your community demographics.
• Evaluate your branch locations and other delivery mechanisms, marking and advertising programs, sales call programs and employee diversity.

Lenders should look at these issues and make appropriate adjustments, if needed, as well as explore other ways to increase lending to all members of their community, including minority individuals.