Reputation on the (red)line

Community banks are taking more steps to prove fair lending practices as the focus on redlining sharpens.

By Ania Scanlan

As one of the most heavily regulated industries, community banks are familiar with managing regulatory expectations. It is understood that noncompliance means facing enforcement from prudential regulators and, in the case of potential fair lending infringements, from the US Department of Justice.

Fair lending has traditionally stood firm in its significant role within the industry. Enforcement action has taken on an “advance and retreat” routine, requiring banks to stay nimble in their compliance efforts. Just when you think that all fair lending enforcement scrutiny has faded, it is sure to reappear larger and bolder than ever before.

Recently, redlining, which has always been present in the banking industry’s fair lending vernacular, has made a comeback as the issue du jour. Redlining, a specific type of illegal discrimination, is when lenders refuse to lend to creditworthy applicants because they reside in a specific neighborhood or geographic area. No bank wants to be accused of redlining, because such accusation carries with it a multitude of risks, including reputational ruin.

“[Community banks] are experiencing enforcement overreach that diverts an abundance of resources … to complying with and responding to unwarranted fair lending allegations.”
—Cam Fine, ICBA

In January, the Department of Justice settled redlining actions with two banks and brought another redlining action against a third. And in April, the Consumer Financial Protection Bureau (CFPB) released its Fair Lending Report, which outlines the bureau’s fair lending priorities for 2017; redlining takes top priority.

A majority of community banks have formal controls in place to continuously evaluate their fair lending compliance programs. Double-checking that your bank’s policies, procedures and actions remain in compliance before your next exam will provide your institution with an added layer of assurance. This should include a review of your bank’s practices related to loan product marketing and advertising, customer dealings, application receipt and processing, underwriting, the imposition of fees and charges, complaint handling, loan servicing and more. Compliance officers and senior management are encouraged to ask, “As an outsider looking at the bank’s practices, are there potential gaps or questions that may result after review of the bank’s lending activity?” If the answer is yes, then the bank should initiate more exploration and mitigation.

Most recently, ICBA, as part of a coalition of financial services trade groups, requested a meeting with US attorney general Jeff Sessions to discuss the Justice Department’s enforcement of fair lending laws. ICBA believes the department has an opportunity to align fair lending policies with Supreme Court precedent.


Ania Scanlan is vice president of ICBA’s Compliance Center.

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