In life it’s a common adage that “an ounce of prevention is worth a pound of cure.” Nowhere is this wisdom more evident than in the realm of fair lending compliance practices. For banks and financial institutions, compliance with fair lending laws is a financial imperative. Redlining, the practice of denying financial services to certain communities on a prohibited basis, can be a costly unforced error in financial management of a company. The penalties imposed by the enforcement agencies have been quite steep, not to mention the unquantifiable damage to a company’s reputation. Another common refrain often heard is “pay now (i.e., invest in proactive redlining compliance) or pay more later.”
In this blog, we’ll explore the multifaceted costs that fair lending non-compliance can inflict. These costs are based on actual data from costly settlements and educated estimates. Fair lending redlining settlements frequently require the lender to agree to allowing the enforcement agency to dictate the structure, workflow, operations, and features of how to run a lending operation in a non-discriminatory manner. This loss of control serves as a stark reminder that the price of non-compliance can far exceed the cost of proactive compliance. Join us as we delve into the financial landscape of redlining violations and discover why adherence to fair lending principles is a cost-effective strategy.
💲Civil Money Penalty: As seen in recent DOJ consent orders, civil money penalties can vary significantly, ranging from thousands of dollars to millions of dollars. Depending on the extent and duration of the redlining violation, the penalties ranged from $50,000 to $5 million.
💲Lending Risk Management Program: Implementing a fair lending risk management and monitoring program may involve hiring compliance officers and consultants, investing in software and systems, and ongoing training. The cost for this program could range from $100,000 to $500,000 or more per year.
💲 Lending Training: Training costs can vary based on the number of employees and the depth of the training required. This might range from $20,000 to $100,000 annually.
💲 Credit Needs Assessment: The cost of conducting a thorough credit needs assessment can range from $10,000 to $50,000 or more, depending on the scope of the study.
💲 Expansion: Agreeing to place physical branches or offices in underserved communities can be a significant cost, potentially ranging from hundreds of thousands to millions of dollars.
💲Subsidy Fund: Establishing a loan subsidy fund is a substantial commitment that can vary greatly, but based on actual cases, it often starts at a minimum of $1 million and can climb as high as $29 million or more. This fund is designed to provide low-interest loans or subsidies to underserved communities, stimulating economic development, and improving access to credit.
💲 Lending/Development Manager/Officer: In accordance with the consent orders, institutions are often required to designate or hire a full-time Community Lending/Development Manager or Officer. The associated costs can encompass not only the individual’s salary but also operational expenses, and can range from $100,000 to $300,000 or more annually, depending on the institution’s size and specific compliance requirements.
💲 Development Partnership Program: Costs for community development partnerships can vary widely, but an annual budget of $50,000 to $200,000 or more may be necessary.
💲Community Outreach, Consumer Financial Education, and Credit Counseling Initiatives: To promote equal access to credit and address redlining violations, institutions are often required to engage in extensive advertising, community outreach, consumer financial education, and credit counseling initiatives. Based on recent consent orders the required investment specified: an annual budget ranging from a low of $20,000 per year to a high of $120,000 to $200,000 per year. These expenses depend on the institution’s size, geographic reach, and the scale of their outreach and education programs.
💲 Additional Progress Reporting: Consent orders often stipulate the need for additional progress reporting to demonstrate the institution’s compliance with the terms of the order. The cost for this extra monitoring and reporting can be estimated at $10,000 to $30,000 per year. The actual expenses within these ranges depend on the size and complexity of the institution and the frequency and scope of evaluations and progress reporting.
Now, as we tally the costs of redlining violations and the measures required to rectify them, excluding civil penalties and the highly variable expenses related to physical expansion, we find that the financial commitment can be estimated as follows:
- Low Estimate: ~$1,310,000
- High Estimate: ~$30,380,000
Keep in mind that these estimates are highly generalized, and the actual costs can be much higher or lower depending on the specific circumstances, regulatory requirements, and the institution’s existing infrastructure. Additionally, intangible costs such as damage to the institution’s reputation and potential loss of business opportunities should be considered as well. Nevertheless, when you consider that the government is taking redlining very seriously, modest investments in proactive redlining compliance can likely protect the lenders profits and reputation over time.