every year there will always be banks and other mortgage lenders that are below peer that are not redlining. Now, the key distinction there between banks that are below peer that have redlining risk and those that do not are banks that have other ways of trying to make sure they're reaching out to and serving the residential lending needs of residents in majority minority areas.
From the American Bankers Association. This is the ABA Banking Journal podcast. Welcome back. I'm Evan Sparks. Today's episode is presented by Alkami and I'm delighted to have on Andrea Mitchell. Andrea is managing partner at Mitchell Sandler, the law firm, which is one of the preeminent law firms in the area of fair lending and and regulatory enforcement in that area.
And so in that vein, I'm really delighted to have Andrea on to talk today about several myths that may be floating out there about redlining and how it is how redlining regulations are enforced and how banks need to and need to think about redlining. So, I'm really delighted to have you on today and on today, Andrea, welcome to the welcome to the conversation.
Thank you, very glad to be here and discuss 1 of these important topics that should be top of mind for all banks.
All right, well, let me get started, you know, I'm just I'm just curious if you could kind of start out by giving us a bit of an overview of you know, where redlining. Enforcement has gone over the last few years, you know, what, how. You know, for particularly for CEOs, a lot of our audience are CEOs and C level management at banking institutions.
What are some of the what are some of the things that they may need to reset in terms of how they think about how regulators are looking at redlining issues?
I guess I would start with a recitation of how we got to where we are right now, which is that we have more than 2 dozen open redlining investigations alone at the Department of Justice, which doesn't take into account investigations at State and federal and even local levels or litigation things that are happening, perhaps at HUD or other agencies. So so taking into account how we got there is I, I really think that it came into the current position that we're in through the launch of the.
A commanding redlining initiative, which was launched in October of 2021. this was a very concerted effort by the Department of Justice in collaboration with other agencies to begin to take a much harder look at redlining than it had perhaps in the past with the other agencies that were conducting examinations and investigations. So. That is how we got to where we are with 2000 plus investigations and 12 settlements since the launch of the the investigations and that initiative.
So, we're seeing banks that have never been scrutinized before for redlining and being told to that. They have risk that they have not before and risk in ways that they've never really viewed it before. So, we're in some new territory, and I think it's important for CEOs to understand what their compliance officers and legal departments are seeing on the ground.
Absolutely. And just to continue with a little bit of the, the table setting here. I mean, the term redlining itself just evokes, you know, paper maps with lines written, marked on them. But we are in a digital banking world. We are in a world where, you know, someone where your market may be nationwide. How are regulators defining redlining violations here in the year 2024? Yeah.
Yeah, I think that's an important way to start off the conversation, which is, it's probably not the traditional way. We all considered redlining when the CRA was enacted and these fair lending laws were enacted to make discrimination by virtue of geography and where credit is available on lawful redlining is no longer, although it still includes the age old practice of drawing a red line and saying, we won't land in this area, but it is much more nuanced.
Now, and the idea really underlying modern day redlining would be that banks or mortgage companies or credit unions that are serving the lending needs, particularly the residential lending needs of the residents in predominantly white neighborhoods better than the lending needs of those in minority neighborhoods.
And we'll get into what we mean by minority neighborhoods later in the conversation, but what's important about that is there can be an inference of intent in lots of ways that banks may not appreciate, which is that it's not that the bank drew the line around the neighborhood. It could be something as simple as putting more dollars into marketing and predominantly white neighborhoods or having branches and.
White neighborhoods where they may not be in minority neighborhoods or loan officers located or products that are well suited to people in minority neighborhoods. So these are all things that banks may not appreciate can collectively be pieced together to create a perceived pattern of redlining where it's simply these were just business strategies with no intention to avoid those minority markets.
Yeah, so I kind of want to tag on onto that. You know, you've got so many different factors that can go into what what, what an enforcement agency may say constitutes redlining. And you, and as you mentioned, there are many banks that would, would never have previously been in the mix for redlining enforcement that where there have been settlements announced. Should every bank be proactively conducting redlining analysis and and monitoring for redlining risk in their institution?
100 percent and and although that may be news to some banks, and particularly at the CEO level, that might be news, there really is no bank that I am acquainted with where there is 0 redlining risk and risk is emerging in ways that we might not have seen otherwise. But the number 1 way to understand as a baseline, whether you have risk. Or not is to understand your data.
And the reason that's so important is that is exactly what the Department of Justice, the other federal enforcement agencies, as well as state enforcement agencies, the way private litigants and the way your examiners are monitoring for potential redlining risk. It always starts with screening. And this is done with publicly available data, which is why private litigants or civics organizations can run that analysis as well.
So, if everybody else can be running it, but banks need to run it as well. And there are a variety of ways that those analyses need to be run. So, it's important to consult with your compliance officers with the knowledgeable people at the ABA, like Kitty Ryan, and with other outside advisors who have a very strong understanding of which analyses to run.
Because it is constantly evolving, but there are some standard ways to run those analyses to understand what your regulators or enforcement agencies might be seeing,
I think there, there might be this mindset that you know, if you have a satisfactory rating, or perhaps, especially perhaps an outstanding rating, that you're good on redlining issues? How does the bank's CRA performance drive its exposure to redlining risk?
A really important question, because I think there is a lot of confusion about this and banks often do get overly confident in their minority market lending performance by relying on a rating and while a low and moderate income census tract may overlap with the majority minority census tract or majority black and Hispanic census tract, they are not 1 in the same and often the lending patterns can look quite different now withstanding
your CRA performance, which, as we all know is based on a lot of factors. Lending is 1 of which, but is not the only factor. So, in other words, banks sometimes have very strong ratings, notwithstanding having some poor minority market lending performance. So it is important not to take false hope that you are immune. And from fair lending scrutiny, if you're doing well in because they are looking at different kinds of tracks.
The other thing, I guess, I will say is, if there was any skepticism as to the theoretical difference between those 2 and how regulators view them, it doesn't It can be there is no better example than FNB Bank, which had an outstanding rating, and it recently entered into a redlining settlement outstanding their superior performance. And I think there that can happen a number of ways.
So, as I've just explained, they are different in terms of how those tracks layout, but, if you're being scrutinized for redlining in a market, that isn't kind of your core market, it might be a new market. For example, that rating can be misleading. And the other thing that's important is that DOJ can launch its own investigations.
They don't rely on a regulator and to refer a matter to DOJ so, for example, if your regulator thinks you're doing very well, even in in terms of minority market lending, and is relying on your CRA rating. There's nothing that prevents HUD or DOJ or other agencies from scrutinizing you. And they may not place the same weight and in fact, do not place the same weight on CRA ratings to evaluate a bank's risk.
So the ability to enforce ECOA and the Fair Housing Act by multiple agencies really means that we shouldn't place all our emphasis on what our own primary regulator is telling us about our performance.
Yeah, you mentioned entering the new banks that are entering new markets and how that that affects their their CRA rating, how does entering a new market affect how you're tested on your lending in minority market census tracts?
Yeah, this is an important topic as well. Simply this in the sense that this is probably 1 of the more evolving areas in terms of redlining enforcement. In in the past, we typically see banks that have been traditionally in a market for a prolonged period of time before they become susceptible to redlining risk.
I don't know if that is because there's just a more aggressive effort to pursue around the lending cases that newer markets are on target for redlining or just simply that there's you know, a new tolerance where the bar has been lower.
But we are seeing, for example, and I just referenced FNB Bank a moment ago, which had literally 0 time, according to the Department of Justice, to get traction in the Winston-Salem and Charlotte markets before they were on the hook for a meeting or becoming close to peer in terms of minority market lending. And by that, I mean, if you look at their consent order and the press release, it's clear that the red line period.
Not only includes the immediate time period following the acquisition of Yadkin Bank, which is what brought them into that market. But it even actually traversed part of the period prior to the acquisition. And the reason that's important for executives to understand is that there is no grace period anymore. And, and other banks have similarly fallen into this situation, where they are only in a market for maybe a few years, a couple of years. We have 1 open investigation.
It's not yet public, but they were not there long at all. And their red line period if it, if it settles will involve immediately after an acquisition that brought them into a high minority market. So the lesson to be learned here is that waste no time. Understand your redlining risk, understand your minority market lending profile before an acquisition and take, you know, have an action plan for deciding what you're going to do on day one, because we need to take action immediately.
And there does not seem to be much appetite for waiting for banks to figure out how to do better in minority markets after an acquisition.
Yeah, so it sounds like this definitely needs to be part of any kind of due diligence related to your related to an acquisition.
Absolutely. And we're working with banks right now that are in in that position and they are running, for example redlining analyses where they combine the targets as well as their own large to say, if we combine today, what would our minority market lending performance look like? So that's the type of exercise that's not hard to do. You can bind your Lars and just.
Essentially treated as if it is one lar and you can even do maps and all sorts of other exercises that are really helpful and understanding. What are you starting with? And where do you need to go?
You know, thinking about that analysis, you know, you know, do you have if you're, if you're doing that analysis and you're comparing yourself to other lenders who are, are to some of your peer lenders in terms of, you know, minority, majority-minority census tracts, how do banks need to be thinking about doing that comparison and that peer analysis and, and who counts as a peer in terms of what enforcement agencies and regulators are going to look at?
Sure. Yeah, this would probably be one of the single most common misconceptions that I see when I come into work with a bank where they either have an exam that may not be going well because it's focused on redlining or they're already a DOJ for an investigation. And they had convinced themselves that they were comparing themselves to their true peers.
And they may, in fact, have had their proper peer group, but it's not the 1 that the government was relying on, which, as we know, is the 1 that matters most when there's a decision, whether to send something to the Department of Justice and whether there is going to be a redlining allegation. The way the government does it, and I am not endorsing it, nor have I acquiesced that this is the right way to do it, but for better or worse, this is what they do.
Is that they will, I mean, they could certainly look at the entire group of hundred filers in a given market, and it's always by market. So, if we're looking at Chicago, we're only looking at home to filers in Chicago, and I say, but by market, they will look at all the HMDA filers, which is an overly broad group.
So, the only adjustment, though, they will make what they call the adjusted aggregate group that is uniformly accepted is that they will pare it down to include HMDA filers that have 50 percent to 100 percent of that bank's loan volume. And the important part of that is there is no filter for asset size. They do not omit independent mortgage companies. They do not omit credit unions.
So you are competing ostensibly in these peer analyses and being compared to with every HMDA filer and the importance of the, of the fact that there's no filter for asset size, at least in the eyes of the government, is that you, you know, you could be a midsize bank or a community bank that somehow manages to be compared to the biggest banks in the country. If that bank has low volume, that mega bank, so to speak, has a low volume, they will.
For loan, volume and be considered a competitor and appear. So, so just the understanding of that, and that is probably 1 of the biggest misconceptions. I see when I see kind of customized peer group is that they, they believed and they were in fact doing well, relative to their customized potential.
So, my, my advice to banks when they're thinking about conducting a peer analysis is do it your own way and understand that and be prepared to explain the virtues of that approach, but also be an understand that the government will probably not accept or agree to use a customized peer group and will be relying on its own, which is a much more difficult task Group to try to compete with by virtue of of minority market lending penetration.
And by the way, those peer analyses are very integral in how the Department of Justice calculates the loan subsidy, which is a part of every settlement. And so those peer analyses really do ultimately add up to dollars and cents for banks that are caught into a settlement and need to pay a loan subsidy over time.
I want to continue this conversation, but I'm going to take a moment here to thank our sponsor for this episode. This episode is presented by Alkami. Your account holders deserve the best. Alkami empowers financial institutions with a single platform for marketing and retail and commercial banking solutions. Banks can accelerate their growth with financial services, marketing automation, transaction data cleansing, and artificial intelligence with digital banking. Visit Alkami.
com to learn more. That's Alkami. com. A L K A M I dot com. And thanks again to Alkami for sponsoring this episode. So I want to, I want to continue in this conversation and just drill down a little bit more in this peer analysis. You know, and if a bank falls below its peers in terms of its lending in this, in these census tracts, you know, should the bank think about, Should think is lending at a peer level truly unattainable.
How should banks think about the best way to use this peer analysis again, either their custom, the customized ones that they develop themselves like you talked about, or a peer analysis that that would be driven by the criteria for for enforcement agencies? How can they use this peer analysis to drive change within the institution?
There are a lot of ways I think this peer analysis should, should be used, but there are also ways that I don't think that banks need to be slaves to it. And I'll explain what I mean by that, which is, as I've already explained, these peer analyses are absolutely essential to run because these are the screening tools, the most common screening tools that we see enforcement agencies and bank regulators using to determine whether to dig deeper and evaluate a bank's redlining risk.
But ultimately, once the decision has been made to look more closely at a bank or a mortgage company for redlining risk, they go into myriad factors beyond just the peer analysis to evaluate whether a bank has made an honest effort to serve the lending needs of the bank. Of the majority-minority census tracts or majority black and hispanic census tract, which is the more common barometer these days for evaluating minority market lending.
And the reason that's important is that being below peer is not illegal. It's not a fair lending violation in and of itself. And every year there will always be banks and other mortgage lenders that are below peer that are not redlining.
Now, the key distinction there between banks that are below peer that have redlining risk and those that do not are banks that have other ways of trying to make sure they're reaching out to and serving the residential lending needs of residents in majority minority areas. And by that, I mean, if you are below peer. But you are doing targeted marketing in those markets, and you have products specifically designed to serve the lending needs in those markets. You're evaluating the lending needs.
You have community ties and strategic partnerships in those communities. You have branches or or at least you have loan officers that are making an effort to meet in those areas with customers and brokers and realtors and referral networks. So the list goes on and on about ways you can demonstrate that you are trying. And even if you are not succeeding to reach the lend, the borrowers, the prospective borrowers in those markets.
So the important part of that is that you may always be below peer, but if you have those other indicia of serving the lending needs, you are in a much stronger position. Now, it doesn't mean you won't be scrutinized, but you are in a much stronger position to defend yourself than if you have nothing to say for your efforts and you're below peer.
So again, I always encourage banks to do their best to obviously be as close to peer or even above peer where it's practical, but there will be markets, particularly for those that are in a variety of markets where you're doing less. Well, in the peer, and in and of itself, that is not illegal. Don't use that as a benchmark for we are violating the law or not. On the other hand, I do think that understanding where you are relative to peer, and maybe even.
You know, the regulators actually are encouraging us now is doing a root cause analysis to say, why are we below peer? And what can we do to improve? That's the exercise banks should be going through. And if you want to close the gap, what we call a shortfall in minority market lending. Developing an action plan that is, you know, may need to be incremental. You may not close that gap in 1 year, or maybe even 2 years.
It may take you a period of time, but creating attainable goals that incrementally close that gap and show efforts to get into those communities and serve them at a better level than maybe where you are now, that is what is typically recognized and typically what differentiates a bank that might go by the way of a settlement versus 1 that has an investigation, but it can be resolved without further action.
Yeah, well, I mean and I mean thinking about you know, trying trying to always be above your be be Of peer, you know, we don't, we don't live in the Lake Wobegon world where, all the banks are above average, right? I mean, we have, we do have statistical reality to deal with.
Exactly. Exactly.
Yeah. I'm just curious what you're seeing in terms of how banks are responding to these investigations, you know, or do we, do we see banks that are, have we seen banks that have, you know, have fought the enforcement actions in quarter are banks generally settling these these investigations as they, as they come up, right?
Well, what we've seen lately is that, as I said, we have 12 settlements and we haven't seen any banks yet that in this administration, and they have the appetite to litigate. Now we have some legacy litigation between the CFPB and Townstone Financial that is playing out in the 7th circuit. So far. It's been an interesting development. And so far as the Illinois district court has decided in their opinion that does not protect borrowers that are not people before they become a borrower. Right?
Which is in this context and redlining, you know, it's. People who've never been contacted that are ostensibly being harmed in, in the redlining situation. So if we don't have an applicant, then ostensibly in, in Illinois, we don't have violations for redlining, but this will play out. This is just 1 jurisdiction and the way this is really, frankly.
being resolved is that because of the Fair Housing Act, which has a broader reach in this space, really just means that the CFPB has had to partner with DOJ to use the DOJ's FHA authority to try to make sure that there's coverage for, for any case where ECOA is the only law applied, which is the only one CFPB can, can enforce. But long story short, that was like a lot of words to say, but that, that redlining is not really being litigated. And in fact, there is not.
Much of a body of case law at all, which really hinders a bank's willingness to litigate because it's so uncertain.
And in the KleinBank matter, that was litigated briefly in, in Minnesota it did not end well for the bank in the sense that they lost on the pleadings and it ultimately settled before full litigation, but it banks generally also because they end up in what we call kind of M&A purgatory, which means that there is no branching and acquisition and other kinds of of M&A activity while these matters are open is it has become unpalatable to stay in this penalty box while the bank sorted
out with through protracted litigation. So there are a variety of reasons why banks have settled these most of which is that the juice isn't worth the squeeze to try to prove that they are right. They'd rather just take their lumps. Pay their subsidy and be back in the game for other kinds of business growth and acquisition activity that appeals to them.
Absolutely. Well, that's that's great perspective. Andrea, thank you so much for being on the show to talk with us about it today.
My pleasure. Thanks for inviting me.
So I'm going to do a couple plugs before we go here. One is. To read an article that Andrea coauthored in the July, August issue of ABA Risk and Compliance, you'll be able to find that article on the ABA Banking Journal website, aBA dot com slash banking journal, a great overview of current trends in redlining. So please do take a look at that. And then the the second piece is just to remind listeners about the virtual access to the ABA risk and compliance conference.
I know Andrea is speaking on that. There is a lot of great fair lending and redlining content at the ABA risk and compliance conference, which has taken place by the time you hear this episode, but the virtual access to the conference will still be available. So you can go and check that out at aba. com slash RCC. Well, I want to thank our sponsor for this episode, Alkami, one more time. Thanks again to Alkami and thanks to Andrea for joining us. We'll be back with you again very soon.