The opportunity cost of modern-day redlining

Modern-day redlining persists, and it’s costing lenders millions in legal fees. Recently, the Department of Justice (DOJ) has taken a strong stance on redlining, taking direct legal action against bad actors and thrusting the topic into the national spotlight. Last October, Ameris Bank had to pay $9 million to settle a redlining case. More recently, Patriot Bank paid $1.9 million, and First National Bank was hit with a $13.5 million settlement to resolve claims it practiced redlining in North Carolina.

When mortgage professionals hear the word “redlining,” they often think of the institutionalized discrimination that was particularly prevalent in the decades leading up to the Equal Credit Opportunity Act of 1974, when risk management models often codified prejudice by limiting access to home-buying opportunities for Black, indigenous, and other people of color (BIPOC).

The lingering systemic impacts of 20th-century housing discrimination have given rise to a new era of redlining that is more often the product of benign neglect rather than overt discrimination. For example, since home appraisals consider trends in past property values, BIPOC neighborhoods may be considered “risky” due to historic segregation and the cumulative effects of chronic underinvestment.

Banks that built most of their branches decades ago may find themselves underrepresented in BIPOC neighborhoods today. Lenders that take out billboards near major shopping centers may be unintentionally redlining majority-minority census tracts (MMCTs) and low-to-middle income (LMI) tracts if they fail to recognize the malls are all located in majority white, affluent neighborhoods.

The true cost of redlining

Lenders need to carefully evaluate their lending strategies to ensure that they are not unintentionally practicing redlining by neglecting MMCT and LMI neighborhoods, or they may face millions in penalties. But the true cost of redlining is still larger, and it’s counted in lost revenue, not legal repercussions.

The cost of lost business opportunity is even higher.

Right now, the market is facing a unique alignment of regulatory focus, community need, and opportunity. Forecasts in the industry predict that most mortgage growth over the next several years will come from MMCTs and BIPOC communities. Lenders who shift their strategies away from the traditional framework to a more inclusive approach are likely to find more success than those who stick to the status quo. Shifting strategies is not only ethical and compliant, it’s financially lucrative.

The future of the mortgage industry is increasingly diverse. From 2020 to 2030, the Urban Institute projects 8.5 million net new households. Only 455,000 of these are projected to be white. According to iEmergent’s U.S. Total Mortgage Volume Forecast, multicultural households will account for about $2.2 trillion in purchase dollars over the next five years, presenting opportunities lenders can’t afford to miss due to antiquated strategies that fail to account for the changing face of America’s homebuyers.

Adapting to meet the needs of an evolving homebuyer pool is vital to success in mortgage lending. The people purchasing homes have changed, growing more diverse and unique. In order to succeed, lenders can’t focus on just staying on the DOJ’s good side — they have to meet their borrowers where they are.

We can do better

The traditional framework sets diverse lending initiatives apart as specialized services. By shifting to a modern mindset and making diversity central to all lending initiatives, lenders can build strategies that are inherently anti-redlining. The key to effectively managing this changing strategy to be diverse and profitable? Data.

By leveraging data to identify gaps in their market coverage, lenders are able to adjust their strategy not only to increase lending in MMCTs and LMI neighborhoods but also to avoid risky penalties. Lenders are also able to shift from the traditional risk-averse approach to lending to an opportunity-ready model. By leveraging data, lenders can focus on finding areas where growth is most likely, rather than focusing on areas where risk is high.

Big changes start with small steps. Adjusting strategy is a slow process, but even long-term change can deliver positive short-term results. Lenders who adopt this way of thinking have reported measurable results in as few as four months.

The true profit, however, is in the long term, and the sooner lenders begin to adapt, the closer the payoff gets. There are a few simple things to keep in mind to build an effective strategy for inclusive lending:

• Recognize the individual audience.
  Diversity doesn’t exist in a vacuum. A Black household may need different programs than an Asian household, but it’s important to recognize people as individuals with more facets than just their minority status. Leverage data to consider the education level, income, individual interests and hobbies, cultural background, career paths and more among your borrowers in order to connect with and serve your community more effectively.

• Find trusted community partners.
  Many lenders think, “Oh, to reach Black neighborhoods, I should hire more Black LOs to connect with potential borrowers.” Though well-intentioned — and we agree, we should definitely hire more diverse LOs — your borrowers are smart enough to recognize this strategy of appeasement. It takes more than just diverse hiring to build trust and profitability in a community or neighborhood.

Lenders will find more success in building community partnerships. By locating and connecting with locations such as public libraries or community centers in MMCTs and LMI neighborhoods, lenders can identify areas of greatest need for affordable lending strategies and generate trust in the broader community. If a stranger starts telling me  they can help me get a mortgage, that’s going to have less sway than if my friend from book club at the library shares their firsthand experience with a loan officer who exceeded their expectations.

• Create internal alignment.
  We’re talking about a complete paradigm shift in the way lending strategy is made, and if you aren’t aligned internally, it will show in the numbers. By ensuring internal teams understand how and why the shift is happening, lenders set their teams up to succeed. Recently, a top lender we spoke with stated that several of their best LOs have shifted to make diverse initiatives their focus, finding great success despite the current market downturn.

• Drill into the data.
  By leveraging data, lenders can build effective, targeted strategies in areas with the greatest opportunity. With the numbers in hand, lenders can also prove need and provide support for initiatives such as SPCPs. Having solid data and clear forecasts also empowers lenders to create and track realistic lending goals, increasing internal alignment. Traditionally, lenders used data to highlight risk. Instead, they need to use data to unearth opportunities.

Lead the market forward

The current trend in the industry and in regulation is moving toward stronger diverse lending practices, as industry forecasts point to diverse households as a primary avenue for growth. Building trust in underserved MMCT and LMI communities takes time, and the first people to dive in will find the brightest, most bountiful opportunities.

Lenders tend to see risk before reward. Taking the first steps into an untapped market may be risky, but the rewards are great. By starting now, lenders will be able to leverage data for the best long-term outcomes, while promoting short-term gains. Lenders who take the first strides forward will gain advantages over their competitors and build stronger relationships with the communities they serve. Don’t wait; start shifting your strategy by investing in data to explore and build your future opportunities through equitable lending practices now.

Laird Nossuli is CEO of iEmergent, a provider of mortgage lending forecasts and analytics to the lending, housing and real estate industries for more than 20 years.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.