Insights
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State and federal regulators are taking aggressive action against mortgage redlining. What lessons can lenders learn from these actions?
Earlier this month, the Consumer Financial Protection Bureau (CFPB) took action against Townstone Financial, alleging discriminatory lending practices and redlining in Chicago’s African American neighborhoods. During October’s Mortgage Bankers Association Annual Convention & Expo, New Jersey’s Attorney General issued a report accusing now-defunct Republic First Bank of systemic discrimination in the form of mortgage redlining. And just two weeks before that, the CFPB took action to end illegal redlining by Fairway Independent Mortgage Corporation, calling for a $1.9 million settlement.
For a lender the size of Fairway, which netted about $1.8 billion in profits last year, a $1.9 million penalty is a drop in the bucket, amounting to only about one tenth of one percent of annual revenue. But for the estimated 22% of lenders currently operating at a loss, such a penalty could spell disaster.
These are hardly the first mortgage redlining cases to emerge in recent years, nor will they be the last. Fortunately, iEmergent’s Mortgage MarketSmart makes it easy for lenders to identify redlining—and make a plan of action for closing gaps in market coverage—before the regulators do.
To see how it works, let’s take a closer look at the Fairway case and see how access to the right data in Mortgage MarketSmart could have helped the IMB identify and address its redlining issue.
The DOJ complaint against Fairway centers on the lender’s activities in the Birmingham-Hoover, Alabama metropolitan statistical area (MSA), a six-county area with a population of more than 1.1 million people.
An accusation of redlining indicates a given lending institution is failing to serve all members of its community. The underserved portion of the community may be defined demographically (for example, Black borrowers) or geographically (for example, borrowers in certain majority-minority census tracts or low- to moderate-income neighborhoods). In the Fairway case, the DOJ says Birmingham-area branches operating under the trade name MortgageBanc failed to service customers in majority-Black neighborhoods.
Let’s map it in Mortgage MarketSmart. The visual below shows the Birmingham-Hoover MSA shaded in green, with majority-Black census tracts (MBCTs), most of which are located along the city’s central corridor, highlighted in yellow:
The DOJ filing examined Fairway’s reportable loans from 2018 to 2022 in the Birmingham area. During that time frame, only 3.3% of the lender’s loans were for properties in majority-Black areas. And of those loans, only 37.8% were made to applicants identified as Black—meaning even the few loans Fairway did originate in Black neighborhoods tended to be for non-Black borrowers.
With Mortgage MarketSmart’s integrated Home Mortgage Disclosure Act (HMDA) reporting, we can look at even more recent data and identify the same kind of patterns noted in the DOJ complaint. As seen in this chart, just 5.0% of the loans Fairway originated in the Birmingham-Hoover MSA in 2023 were in MBCTs. Moreover, of those loans, a mere 23.3% were made to applicants identified as Black.
As of this writing (November 2024), 2023 is the most recent year for which HMDA data is available—so for an even more current look at Fairway’s lending patterns, we’ll have to turn to a different data source. Fortunately, Mortgage MarketSmart makes it easy with our county recorder data feed, which is updated weekly and covers 94% of the U.S. population.
Let’s take a look. In the map below,the purple star is Fairway’s branch, and the orange dots indicate purchase loans originated year-to-date in the Birmingham-Hoover MSA based on property records sourced from county recorders. . Since property deeds don’t contain information about a borrower’s race or ethnicity, it’s impossible to tell which of these loans were made to borrowers of color. However, by plotting the loans visually against the backdrop of Birmingham’s MBCTs, highlighted in yellow, it’s easy to see persistent gaps in coverage.
iEmergent’s Mortgage MarketSmart empowers lenders with actionable data that makes it easy to visualize gaps in market coverage. What’s more, our data shows lenders the ideal mortgage professionals, strategic partners, and community centers of influence to close those gaps with targeted lending strategies.
By ensuring they serve their entire communities, lenders will not only avoid costly redlining penalties, but also uncover untapped business opportunities. In our recent Redlining Roundtable, we highlighted the $4 trillion opportunity in potential originations represented by the racial homeownership gap. If the gap is narrowed by only 5% over the next 20 years, it could generate $200 billion in revenue. With forecasted originations falling short, it is critical for forward-looking lenders to examine every opportunity.