In the wake of the subprime implosion, the Obama Administration has stepped up its scrutiny of disadvantaged neighborhoods’ credit access.  Lawyers and bank consultants say regulators and the Obama Administration are scrutinizing financial institutions for a practice that last drew attention before the rise of subprime lending: Redlining.  The term dates from the 1930s, when the Federal Housing Administration drew up maps using red ink to delineate inner city neighborhoods considered too risky for lending.  Congress later passed laws banning lending discrimination on the basis of race and other characteristics.  For example, the 1977 Community Reinvestment Act (“CRA”) requires banks to make loans in all areas they serve, not just the wealthy ones.  A Bloomberg analysis found the percentage of banks earning negative ratings from regulators on CRA exams has risen from 1.45 percent in 2007 to more than 6 percent in the first quarter of this year. “The agencies have refocused on redlining because, in the wake of the subprime explosion and sudden implosion, they are looking at these disadvantaged neighborhoods and not seeing any credit access,” says Jo Ann Barefoot, co-chair at Treliant Risk Advisors in Washington, D.C., which consults with banks on regulatory issues.

At the Justice Department, a new 20 person unit dedicated to fair lending issues received a record number of discrimination referrals from regulators in 2010 and has dozens of open cases, according to a recent agency report.  Potential penalties can reach into the millions of dollars.  “We are using every tool in our arsenal to combat lending discrimination,” Thomas E. Perez, the Assistant Attorney General for the Civil Rights Division, told a conference of community development advocates in Washington, D.C., in April of this year.  But to some banks, the crackdown has come as a surprise, say consultants and lawyers representing monetary institutions in discussions with regulators.  “If you place your branches only in upper-income areas, the regulators are not accepting that anymore,” says Warren W. Traiger, a lawyer at Buckley Sandler in New York, which advises banks on honest lending issues.  Bank lobbyists claim that the stepped-up government scrutiny could backfire if financial institutions decide to shrink their operations rather than yield to pressure to do business in areas that don’t make sense for them: “It would do a disservice to communities for a bank to suddenly pull back,” says Robert Rowe, Vice-President and Senior Counsel for the American Bankers Association.

Source: Clea Benson, A Renewed Crackdown on Redlining, Bloomberg Businessweek, May 5 and 11, 2011, (Online), at pp.1-2.