In our previous post on the topic of redlining, we discussed how redlining is an issue that can have serious consequences for banks that do not adequately manage these risks. However, detecting and correcting redlining issues can be complex and nuanced, which is why it’s important to be proactive in addressing these and other fair lending related risks.
Risk is Inevitable
Risk is inherent in all lending activity, including compliance, credit, and fair lending risk. All lending operations pose some degree of fair lending risk. In the current political environment, compliance and fair lending risks have emerged as the primary challenges facing Institutions.
The regulatory environment today demands a managed approach, including the recognition of different types of fair lending risk, taking steps to mitigate these specific risks, and then ongoing monitoring to evaluate the effectiveness of these efforts. Redlining in particular is of grave concern due to the regulatory and enforcement priorities placed on it in recent years by the agencies.
The Challenges in Managing Redlining Risk
There are (2) unique challenges in detecting redlining concerns that can be obstacles in regard to evaluating redlining risk.
The first is that institutions do not intentionally redline; that is, in all but extreme cases, lenders are not deliberately excluding communities with respect to lending within their market areas.
This sometimes becomes a blind spot, and lenders assume they have no redlining risk. Accordingly, they may pay little attention to some of the factors that could contribute to the appearance of redlining, including such things as overly stringent loan underwriting criteria and limited loan product offerings.
Another related challenge is that redlining risk may be more subtle and difficult to quantify.
The regulations include all facets of lending activity with respect to redlining, including such factors as marketing, branch locations, and lender training, in addition to lending activities. It is important to recognize there are a number of different pressure points with regard to evaluating redlining risk, and that indicators of potential redlining issues are multi-dimensional. It is therefore essential that lenders in their fair lending evaluations in general, and redlining specifically, understand what these dimensions are and how to measure them.
If you want to learn more about the nuances and challenges of detecting and correcting fair lending redlining issues, download our complete guide on the topic below. In this guide, we’ll provide much more in-depth information on how to ensure compliance and protect your bank from redlining risks.
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Combating Redlining:
An Examination of Lending Policies and Practices, Detection Methods, and Corrective Measures