Financial services organizations continue to adjust the way they operate – from business models and digital banking platforms to third-party partnerships and mergers and acquisitions. But even in the face of change, financial services organizations are obligated to treat all customers in a fair and responsible manner.
This obligation is underscored with the U.S. Department of Justice’s launch of the Combatting Redlining Initiative.1 The initiative represents a robust and coordinated effort to investigate and prevent redlining, which is prohibited by the Fair Housing Act and the Equal Credit Opportunity Act.
Laws to combat redlining have been in place for more than 50 years, but financial services organizations can’t afford to assume their lending practices comply. Instead, they need to regularly verify that they are compliant. A single violation can cause significant harm to an organization. Consequences can include damaged brand and reputation, costly fines and penalties, and derailed strategic growth opportunities, such as acquisitions or introducing new products or services.
Is your organization monitoring these five areas for redlining risk?
The Justice Department’s initiative is an important reminder for financial services organizations to reassess how they are monitoring for redlining risk and how they can prepare for increased regulatory scrutiny.
Here are five critical areas your organization can monitor more closely for redlining risk:
- Model development. Many organizations falsely assume that automated data models will eliminate discrimination. Unfortunately, without strong model development and data governance policies in place that include a fair lending review, underwriting and pricing engines might unintentionally discriminate based on factors such as where potential customers live or even what type of car they drive or the type of phone that they use. Organizations should determine how automated tools are being used and perform ongoing monitoring and analysis.
- Marketing strategy and messaging. Organizations should take a closer look at how they advertise, including the targeted audience and the areas in which they are is concentrating its efforts. For example, is it marketing similar products and services to both low-income and high-income neighborhoods? Are products attainable by varying income categories? Organizations should make sure their channels and media include a wide range of audiences within a reasonably expected market area (REMA). Working with risk and compliance teams, including a community reinvestment team, can help marketing departments identify and avoid potential fair lending risks.
- Digital advertising. The algorithms online advertising platforms used to distribute ads can be complex and confusing. But if organizations aren’t performing due diligence to understand who is being targeted and where advertising is targeted, then they could be committing unintentional discrimination. Lookalike audiences, for example, can discriminate by race or ethnicity depending on the metrics and factors used for segmentation and resulting groupings.
- Third-party management. The business practices of an organization’s third-party partners can affect fair lending risk. Organizations should monitor how fintechs, brokers, agents, and dealers offer products, interact with customers, and market services to make sure third parties are not introducing potential redlining violations. These efforts should include identifying potential reverse redlining, which illegally targets borrowers based on income, race, or ethnicity and offers them credit on unfair terms.
- Community outreach. Organizations can partner with their internal Community Reinvestment Act teams and programs to drive additional diversity efforts in underserved neighborhoods. These relationships help address potential redlining issues, and they can also provide positive business impacts as organizations build their portfolios through identifying new customers, expansion, mergers, or acquisitions.
Crowe can help you identify and avoid redlining risk
In addition to reducing the risks associated with redlining, financial services organizations that intentionally focus on inclusion can provide greater value to both their communities and shareholders by attracting more customers and helping underserved communities.
Crowe specialists combine data analytics with deep industry experience and regulatory knowledge to help organizations accurately assess fair lending risks and then develop policies and procedures to help improve:
- Strategy
- Continuous monitoring
- Evaluation of analytics
- Peer benchmarking
- REMA mapping
1 “Justice Department Announces New Initiative to Combat Redlining,” United States Department of Justice, Oct. 22, 2021, https://www.justice.gov/opa/pr/justice-department-announces-new-initiative-combat-redlining
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