Evaluating redlining risk can take a number of forms and methods. In a recent webinar by the FDIC, the agency reaffirmed and provided more detail about a bank’s “REMA”, or Reasonably Expected Market Area.
Bank market areas are usually understood to be the CRA assessment area or what is known as the bank’s “trade area.” In many instances, these may be the same or similar, but a bank may have a trade area which encompasses areas in which it generally will extend credit but some of the geographies would not be the focus of CRA efforts. A bank is evaluated in terms of CRA based on its assessment area, but redlining could be evaluated more broadly, hence the concept of the REMA.
The FDIC provided more information with how they would apply this approach in a webinar which can be downloaded here: https://www.fdic.gov/news/conferences/other_events/2017-03-30.pdf
In essence, the presentation emphasizes that banks should examine their lending patterns broadly encompassing all geographic areas in which they conduct lending activity.
As a simple example, elevated fair lending risk may exist if a bank had lending activity outside of its CRA assessment area that was concentrated in non-minority census tracts while there were many minority tracts within the assessment area in which there was little or no penetration. This of course could also impact how the assessment area was delineated, which is another area of risk covered in the presentation.
As always, the takeaway is that lenders must be vigilant in their monitoring efforts but also in marketing and business development to ensure they are meeting the credit needs of their respective communities. This is good business and also mitigates risk.