Identifying, Assessing and Mitigating Potential Redlining Risk

Identifying, Assessing and Mitigating Potential Redlining Risk

Objectives Understanding Potential Redlining Risk Understanding the Reasonable Expected Market Area (REMA) vs CRA Assessment Area Understanding Lending Patterns and Demographics Identifying and Mitigating Risks Through a Risk Assessment Mapping and Measuring the Effectiveness of a Fair Lending Program 2

Potential Redlining Risk Defining Redlining Identifying Redlining Risk Factors FFIEC Interagency Fair Lending Examination Procedures 3

What is a REMA? REMA: Reasonably Expected Market Area FFIEC Interagency Fair Lending Examination Procedures state: REMA - where the institution actually marketed and provided credit and where it could reasonably be expected to have marketed and provided credit Some REMAs might be beyond or otherwise different from a bank s CRA assessment area 4 4

Why is the REMA Important? The REMA is used to evaluate redlining risk The analysis will determine whether a bank is providing equal access to credit to those in its REMA. This will involve looking at whether the bank is: Not extending credit in certain areas Targeting certain areas with less advantageous products Offering different loans to different areas Not marketing residential loans to certain areas 5

How is the REMA Determined? Discussion with Bank Branching Marketing Efforts Print Advertising Calling Program Direct Mailings Brokers or Realtors Location/Areas Served 6

Assessment Area vs REMA Example 1 7

Assessment Area vs REMA Example 2 8

Risk Assessments Identifying and Evaluating Risks 9

Redlining Indicators Interagency Procedures Significant differences, as revealed in HMDA data, in the number of applications received, withdrawn, approved not accepted, and closed for incompleteness or loans originated in those areas in the institution's market that have relatively high concentrations of minority group residents compared with areas with relatively low concentrations of minority residents. (R1) Significant differences between approval/denial rates for all applicants (minority and nonminority) in areas with relatively high concentrations of minority group residents compared with areas with relatively low concentrations of minority residents. (R2) Significant differences between denial rates based on insufficient collateral for applicants from areas with relatively high concentrations of minority residents and those areas with relatively low concentrations of minority residents. (R3) Significant differences in the number of originations of higher-priced loans or loans with potentially negative consequences for borrowers, (i.e., non-traditional mortgages, prepayment penalties, lack of escrow requirements) in areas with relatively high concentrations of minority residents compared with areas with relatively low concentrations of minority residents. (R4) 10

Redlining Indicators Interagency Procedures Other patterns of lending identified during the most recent CRA examination that differ by the concentration of minority residents. (R5) Explicit demarcation of credit product markets that excludes MSAs, political subdivisions, census tracts, or other geographic areas within the institution's lending market or CRA assessment areas and having relatively high concentrations of minority residents. (R6) Difference in services available or hours of operation at branch offices located in areas with concentrations of minority residents when compared to branch offices located in areas with concentrations of non-minority residents. (R7) Policies on receipt and processing of applications, pricing, conditions, or appraisals and valuation, or on any other aspect of providing residential credit that vary between areas with relatively high concentrations of minority residents and those areas with relatively low concentrations of minority residents. (R8) The institution s CRA assessment area appears to have been drawn to exclude areas with relatively high concentrations of minority residents. (R9) 11

Redlining Indicators Interagency Procedures Employee statements that reflect an aversion to doing business in areas with relatively high concentrations of minority residents. (R10) Complaints or other allegations by consumers or community representatives that the institution excludes or restricts access to credit for areas with relatively high concentrations of minority residents. Examiners should review complaints against the institution filed either with their agency or the institution; the CRA public comment file; community contact forms; and the responses to questions about redlining, discrimination, and discouragement of applications, and about meeting the needs of racial or national origin minorities, asked as part of obtaining local perspectives on the performance of financial institutions during prior CRA examinations. (R11) An institution that has most of its branches in predominantly non-minority neighborhoods at the same time that the institution's sub-prime mortgage subsidiary has branches which are located primarily in predominantly minority neighborhoods. (R12) 12

Redlining Risk Potential Redlining Risk Indicators Lack of applications and lending (R1) Taking partial counties as CRA assessment areas (R9) Qualifying borrowers in majority minority tracts (R2) Lack of branches in minority areas (R12) Not drawing business from majority minority tracts (R1) Lack of information on affordable home program information or convenience on bank websites (R8) Lack of a strategy to compete with mortgage entities using technology (R8) 13

Risk Assessments Identifying and Evaluating Risks Risk Factor Lack of applications and loans in majority minority tracts Strategies for Applications (Examples) Consider effectiveness before implementation Marketing Real estate referral sources Generic direct or mass marketing may not provide the best results. Should the marketing provide information on borrower incentives to attract borrowers? Will outreach efforts in the community be a better approach than advertising? Make sure referrals are RESPA compliant Credit reporting referral programs Partnering with real estate entities to hold homebuyer seminars Some credit reporting agencies offer referral programs for prospective borrowers with recent mortgage inquiries What incentives does the borrower have for coming and how to get them mortgage ready 14

Risk Assessments Identifying and Evaluating Risks Risk Factor Taking partial counties as CRA assessment areas Principles to Consider: Assess both Fair Lending and CRA risks Starting point Look at taking whole counties Shrink down Ensure reasons are supported and logical 15

Risk Assessments Identifying and Evaluating Risks Risk Factor Taking partial counties as CRA assessment areas Analysis Considerations (not inclusive list): Lending outside the CRA assessment area where concentrated Strategic plan targeting areas broader than the partial county Deposits from area broader than the partial county Majority Minority Tracts location within and just outside of the CRA assessment area 16

Risk Assessments Identifying and Evaluating Risks Risk Factor Qualifying borrowers in majority minority tracts Action Plan: Become familiar with the credit needs of individuals in the majority minority tracts Identify challenges to qualifying and how to overcome Underwriting Criteria Challenge (Examples) Low Credit Score Delinquent Credit Underwriting Structuring Options Using nontraditional credit sources such as rent, utility, phone or loans with other companies. Develop procedures to request for an explanation of delinquent credit early in the application process 17

Risk Assessments Identifying and Evaluating Risks Risk Factor Qualifying borrowers in majority minority tracts (Continued): Underwriting Criteria Challenge (Examples) High debt-to-income ratio Lack of Down Payment Underwriting Structuring Options Using programs which allow higher debt-toincome; Looking at whether current debts can be consolidated for lower payment Use local, state, or federal community organizations or programs for down payment assistance Collection Activities on Credit Report Consider factors such as the number, type, and amount of collections. Look at whether the collection is paid or not recent. Fair Lending Compliance Ensure the underwriting standards and level of assistance are applied consistently with all borrowers 18

Risk Assessments Identifying and Evaluating Risks Risk Factor Lack of branches in majority minority tracts Harder to serve an area without a branch for banks that offer credit products through branch locations. Local community members may not be aware of your brand and image Perception from individuals in majority minority tracts may negative if the bank s branches are mostly in non-minority areas. 19

Risk Assessments Identifying and Evaluating Risks Risk Factor Not drawing business from majority minority tracts whether or not branches are present Sources of Business (Examples) Make of list of real estate entities to pursue relationships both consumer residential and commercial residential Mortgage companies Third Party Originators Housing counseling community organizations Other avenues, such as outreach Validation Process Find evidence that they successfully or potentially can serve majority minority tracts Find evidence that they successfully or potentially can serve majority minority tracts Pull a listing from HUD s homeownership counseling website. Enter zip code and query will find local organizations. In person outreach with local community leaders or organizations 20

Risk Assessments Identifying and Evaluating Risks Risk Factor Lack of information on affordable home program information or convenience on bank websites Strategies (Examples) Consider how each will effectively draw people within the minority majority tracts Design website to draw people to start the mortgage process Make Mobile application process available, convenient, and easy to navigate to find How can our bank compete with online mortgage lenders that may offer convenient mortgage application processes? Can we keep our personal service business model but enhance the product delivery to add convenience? Add information on incentives available and flexible underwriting standards Can we promote the convenience of our application process? Can we offer a way for the applicant to upload electronic documents securely or deliver status update messages through a portal? 21

Risk Assessments Identifying and Evaluating Risks Risk Factor Lack of a strategy to compete with mortgage entities using technology - Is there a way to reduce the time for a mortgage approval? - Is there a way to facilitate the mortgage process, such as online mortgage applications or promoting the convenience of finding mortgage options through a few simple steps? elivonvenience? 22

Mapping and Measuring the Effectiveness of a Fair Lending Program 23

Mapping and Measuring the Effectiveness of a Fair Lending Program Analyzing Lending Patterns Review lending patterns visually Look at both HMDA applications and originations When historical risk is noted, periodically track rather than waiting for the annual HMDA data Evaluate what lending policies, procedures or practices are driving the lending numbers Think about how changes correlate to the numbers before implementing changes Take action - Implement changes and reevaluate delivery to add convenience? 24

Mapping and Measuring the Effectiveness of a Fair Lending Program Analyzing Lending Patterns (Continued) Banks can analyze without fair lending software Example Using pivot tables in Excel Consider comparing your bank s lending numbers to a similar situated HMDA group and demographics Typically 50 to 200% of your bank HMDA volume This data can be pulled from the FFIEC website and calculated without fair lending software FFIEC HMDA Flat Files Data for Similar Situated HMDA group: https://www.ffiec.gov/hmda/hmdaflat.htm Keep in mind that your lending volume changes annually and your peers will change each year as well 25

Mapping and Measuring the Effectiveness of a Fair Lending Program Analyzing Marketing Marketing is more than advertising/promotions Outreach efforts are part of marketing Develop measurable performance goals, such as increase in loan applications or loan originations for a time period Establish a tracking system Reevaluate whether performance goals met Take action - Revise marketing if performance goals are not met 26

Mapping and Measuring the Effectiveness of a Fair Lending Program Efforts Taken But Not Seeing Improvement In Lending Numbers Be persistent and don t get discouraged. Start actions early for these reasons. 27

Mapping and Measuring the Effectiveness of a Fair Lending Program Reporting to the Board or Bank Management Report the statistical analysis (the lending patterns) Look at lending patterns by volume and geographic distribution Trend analysis can be used to show whether numbers are going upward or downward Explain where the bank does well and where there are deficiencies. Don t just provide maps or numbers in tables without analysis. Report the non-statistical analysis What are the policies, procedures and practices driving the numbers Provide an accurate picture of risk. Highlight weak areas and the methodology for corrective action. The quality of the reporting is more important than quantity. 28

Final Point and Questions 29

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