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Warning for Lenders: Regulators Watching Closely for Redlining

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BY CINDY WILLIAMS

While it may have been prohibited for decades, redlining continues to be on the minds of regulatory agencies like the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ), as well as the prudential regulators. In fact, these agencies have issued more than $40 million in redlining-related fines, settlements and enforcement actions since the second quarter of 2015. The practice of excluding minority consumers from lending programs (or increasing fees for service to them), redlining can – and does – occur, sometimes inadvertently.

The term “redlining” comes from early cases of discrimination in which lenders and real estate agents drew a red line on a map around neighborhoods they did not want to serve. “Today we are focusing on redlining from an access-to-credit standpoint,” the CFPB’s Sam Gilford told American Banker magazine.

How does a discriminatory practice happen unintentionally? Quite easily. Read on to learn how it occurs, as well as a few suggestions for how to avoid it.

Indirect lending presents challenges 

Auto loans marketed through car dealerships often create redlining potholes, largely because of a fluctuation in pricing. The other trouble spot with these loans is they are often outside the credit union’s immediate control with some dealers choosing to charge certain borrowers higher rates. This is a no-no. Even though not dictated by the credit union, the choice to allow price differentiation is ultimately assigned to the cooperative. Examiners will tell you – when it comes to indirect lending, the buck stops with you.

To lessen risk to the credit union, restrict your dealer partners’ ability to price up loan rates. To be sure, this can be a challenge and should be addressed in your contract with the lender. Understandably, dealers want higher rates because they often equal higher returns. However, the reduced risk is worth the effort of negotiation.

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