New York Governor Kathy Hochul has signed legislation expanding the New York Community Reinvestment Act (CRA) to cover non-depository lenders. This follows similar legislation from Massachusetts and Illinois aimed at ensuring fair and equal access to lending options. 

Non-bank mortgage lenders doing business in these states will need to ensure that their practices do not discriminate against minorities and low-income communities, either intentionally or otherwise. 

Critics of the CRA’s expansion fear that such measures will stifle innovation, claiming that it is counterproductive to impose banking regulations on non-bank lenders. Other observers have noted that non-depository lenders have assumed a much larger role in mortgage markets, arguing that their increased involvement requires greater supervision. 

Redlining in particular — the practice of discriminating against specific communities when making lending decisions — has come under scrutiny from the U.S. Department of Justice. In an announcement about its anti-redlining efforts, the department also stated that it had reached a settlement with a bank accused of maintaining inadequate internal fair-lending policies and procedures. 

Non-bank mortgage lenders have already been the target of redlining complaints. In 2020, the Consumer Financial Protection Bureau accused a Chicago mortgage lender of discouraging prospective Black applicants from applying for home loans.  

The question is now whether non-bank lenders are more likely to face increased regulatory action at the federal level, or through changes implemented by individual states. Legal experts have pointed out that it will be important to take a proactive approach in evaluating fair lending risks and ensuring adequate internal controls to mitigate the risk of redlining complaints. 

Responsible Data Management 

Going forward, it is important for lenders to continuously monitor the impacts of existing data products and have a strong understanding of how unintended discrimination can manifest. The use of some attributes, such as zip codes, can become proxies for race that perpetuate structural racism.

Lenders should maintain a risk management framework to monitor unfair discrimination in the context of external data, and they must be prepared to explain how external data is sourced and used in credit decisioning. This work is easier when external data vendors provide detailed information regarding data quality, coverage, and applicable use.

Keeping up with external data developments is easy with support from the right technology.

Demyst works with clients to help them identify and eliminate biases in their analytical models, performing a comparison of historical credit decisions with external data attributes to identify biases and prevent discrimination against minorities and low-income communities.