Hi! It’s Tory Haggerty from Tuscan Club University’s Fair Lending School and welcome to another Fair Lending Short.
In this fair lending short, we are going to talk about redlining for products other than home loans.
Home loan lending gets the headlines when it comes to redlining, and rightfully so, but lenders can engage in redlining in any loan product.
I’ve had many bankers tell me “but we are a commercial lender”. That’s great – good to know, but you still have fair lending and redlining risk.
While there is a textbook definition of redlining, it’s essentially not lending to certain geographic regions, and spoiler alert, they are high minority areas.
We have audit clients that are primarily commercial lenders. When we do their fair lending review, we geocode their commercial purpose loans and compare their lending performance against the demographics of the areas they operate.
Here’s a pop quiz – if 40% of the census tracts in your market area are majority-minority, what percent of loans originated every year do you think should be in majority-minority census tracts? The answer should line up closely with the demographic population.
If 40% of your area is majority minority census tracts, and only 10% of your commercial loans went to those tracts, you are lagging 4 times behind what your demographic data says you should be doing. That’s simple geocoding and math, and that’s free. It just takes a little time to collect the data.
We have even conducted redlining reviews for credit card portfolios following the same logic.
The one thing you don’t want to lose sight of is this is only a geographic distribution analysis. In other words, you only know the neighborhoods where you are lending. Unlike HMDA, you don’t have the data that tells you a business owner’s race or ethnicity. 1071 data will change that. Your lenders need to be aware that the decisions they make today will be evaluated for redlining performance in the future.
Thanks for reading!
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