The Justice Department’s initiative is an important reminder for financial services organizations to reassess how they are monitoring for redlining risk and to ask themselves how they can prepare for increased regulatory scrutiny.
Here are five critical areas your organization can monitor more closely for redlining risk:
1. Model development
Many organizations falsely assume that automated data models will eliminate discrimination. Without reliable data, careful model development, and data governance policies that include a fair lending review, underwriting and pricing engines might unintentionally discriminate. For example, redlining risks can arise when models base decisions on factors like where potential customers live, if and where they attended college, and even what type of car they drive or type of phone they use.
To address these possibilities, organizations should determine how alternative data, machine learning, and automated tools are being used within the organization and then perform ongoing monitoring and analysis of the results.
2. Marketing strategy and messaging
Organizations should look closely at how they advertise, including their targeted audience and the areas where they concentrate their efforts. For example, is the organization marketing similar products and services to both low- and high-income neighborhoods? Are products attainable by varying income categories?
Channels and media for financial services marketing should include a wide range of audiences within a reasonably expected market area (REMA). The organization’s risk and compliance teams, preferably including a community reinvestment team, should be able to help marketing departments identify and avoid potential fair lending risks.
3. Digital advertising
The algorithms that online advertising platforms use to distribute ads can be complex and confusing, which leads to possibilities for unintentional discrimination. Lookalike audiences, for example, can discriminate by race or ethnicity depending on the metrics and factors used for segmentation and the resulting groupings. Organizations must address these risks by performing thorough due diligence to understand who is being targeted and where digital advertising is focused.
4. Third-party management
The business practices of an organization’s third-party vendors can affect fair lending risk, so it’s important to understand how each third party will support risk management efforts. To make sure third parties are not introducing potential redlining violations, organizations should monitor how vendors – including fintechs, brokers, agents, and dealers – offer products, interact with customers, and market services. These monitoring efforts should include identifying potential reverse redlining, which involves illegally targeting borrowers based on income, race, or ethnicity and offering them credit on unfair terms.
5. Community outreach
Organizations can collaborate with their internal Community Reinvestment Act teams and programs to support additional diversity efforts in underserved neighborhoods. These relationships can help address potential redlining issues, and they can also provide positive business impacts as organizations build their portfolios through expansion, mergers, acquisitions, and identification of new potential customers and markets.
