Hot Topics in Fair Lending – The Secret Sauce is in your REMA

Written by M&M Consulting

March 1, 2023

Ask any lending compliance officer in a financial institution what keeps them up at night lately, and their reply will probably have something to do with Fair Lending – specifically redlining, and the new issue, appraisal bias. This multi-part article will consider both.

Redlining: It would be difficult to ignore what is happening in the regulatory world over the past year in terms of redlining. Redlining is an illegal practice in which lenders avoid providing services to individuals living in communities of color because of their race or national origin. Redlining is prohibited by the Fair Housing Act and the Equal Credit Opportunity Act. This issue is red-hot due to the Department of Justices (DOJ’s) nationwide “Combating Redlining Initiative” that launched in October 2021. This initiative has resulted in multiple redlining cases with settlements as large as $31 million – some of which are shown below:

October, 2021:  $1.3 million Bank in Tennessee

July, 2022:  $22 million Mortgage Company

September, 2022: $13 million Bank in New Jersey

January, 2023:  $31 million Bank in California

The settled cases all had elements in common, such as:

  1. Avoid providing mortgage lending services to majority-Black and Hispanic neighborhoods.
  2. Discouraged residents in these neighborhoods from obtaining mortgage loans.
  3. Had few or no branches in majority-Black and Hispanic neighborhoods. Where branches were located in majority-White neighborhoods, the loan officers in those branches did not serve the credit needs of neighborhoods of color.
  4. Where there was a branch in a majority-Black and Hispanic neighborhoods, had no one assigned to generate mortgages.

One case even used racial slurs and derogatory language when referring to communities of color.

Although analysis of the institution’s REMA (Reasonably Expected Market Area) is the major task mentioned by regulators when discussing redlining, one wouldn’t have needed to perform much of an analysis to reveal the issues noted above. But since most redlining is more nuanced, institutions are advised to perform analysis on their REMAs as least annually. Let’s look at the secret sauce in the REMAs.

How Regulators Define a REMA:

Per the FFIEC Interagency Fair Lending Examination Procedures, the REMA is where the institution actually marketed and provided credit and where it could reasonably be expected to have marketed and provided credit. Most importantly, some REMAs might be beyond or otherwise different from a bank’s CRA assessment area. During recent conferences, examiners have noted that REMAs are being perceived very broadly. That’s an important difference to be aware of, especially for small community banks. Many small community banks combine Fair Lending and CRA under one manager in the compliance department and under one management committee, increasing the likelihood that the bank could consider the REMA to be the same as the CRA Assessment Area. But if a financial institution were to only use its CRA Assessment Area to perform redlining analysis, the results could be much different than what examiners will find when they perform their analysis. Since no compliance officer wants redlining surprises, it’s best for the institution to define its REMA and thoroughly document how it arrived at its REMA – being careful to incorporate the regulators’ methodology. Anticipate the “credible challenge” that this area will receive upon examination and be ready to respond to it. Suffice it to say that a bank could be increasing its redlining risk if it is using its CRA Assessment area as its REMA.

Mapping and What to Map:

REMAs are determined using mapping, and this is the most important part of the REMA documentation.  Fair Lending Officers will want to map the following into their Draft REMA:

  • Location of branches
  • Location of applications
  • Location of originations
  • Location of sales calls. Yes, in most community banks, loan officers have to submit reports for when they call upon someone. First, ensure these reports include location information. If not, update the report template. For this analysis, location will need to be estimated. Examiners could ask for these, might as well get in front of it.
  • Location of real estate agent relationships. Examiners could ask for this information, as well.  Best to get in front of it.
  • Location of marketing. See marketing section below.

The best way to complete the mapping exercise is with geocode mapping software.

Make Friends with Marketing:

The marketing department should have detailed records on the institution’s marketing and outreach efforts over the prior two years. It’s difficult to limit the scope of this, but at the very least the marketing department should have two years of marketing details. There is a fly in this ointment in that some digital advertising vendors used personal information collected about users in order to target populations or exclude populations from seeing the ad, or changed the ad based on the audience. Compliance Officers should ensure that the marketing department is saving any such flags, choices, or selections made when placing the ad. Additionally, the marketing department must document their understanding of how each digital advertising programs works. Without this information it would be difficult to map the marketing for REMA purposes.

Review the REMA’s Census Tracts & Perform Analysis:

Within the draft of the REMA area identified above, note and review the Substantially Minority Census Tracts. Step back and analyze where loans are being made compared to Substantially Minority Census Tracts. Given the analysis, assess the risk that the bank could be viewed as redlining. As with other examinations such as BSA where the examiners will have already analyzed SARs, the examiners will have already conducted their own redlining analysis on the area that they believe is your REMA. As mentioned above, be prepared to explain your REMA but be ready for the credible challenge that will surely occur. The bank that hasn’t conducted the above will likely face a high-risk exam.

Before finalizing the draft REMA into a final REMA, it is a good idea to have a discussion with your examiner before the First Day Letter arrives. Most banks have regularly scheduled calls with their examiners, and the EIC will likely involve a Fair Lending expert examiner in the call. As always approach the call with an attitude of “we want to gain an understanding of your perspective.” That will greatly help banks finalize their REMA.

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