In the largest fair lending enforcement action in several years, the Department of Justice (DOJ) and the Office of the Comptroller of the Currency (OCC) on August 30 announced simultaneous settlements with a national banking association (the Bank) regarding alleged violations of the Fair Housing Act (FHA) and, in the DOJ's complaint, the Equal Credit Opportunity Act (ECOA). Notably, these are separate but coordinated settlements. The DOJ and OCC alleged that the Bank engaged in lending discrimination by redlining predominantly black and Hispanic neighborhoods in the Houston metropolitan area. The size of the settlements—a $3 million penalty and requirements to invest at least $5.5 million more on various initiatives—and the scope of the allegations in the DOJ's complaint and the OCC's consent order make one thing clear: Fair lending and other issues of “racial equity” will be enforcement priorities for the Biden administration.
In October 2017, the OCC began a fair lending examination, including statistical analyses and comparisons to peer lenders, of the Bank. (The Bank asserts that it self-identified the issues addressed by the settlements.) The OCC concluded that the Bank had likely engaged in FHA violations by structuring its mortgage operations to avoid providing access to first-lien mortgage loans to residents in majority-minority census tracts in the Houston metropolitan area. On January 30, 2019, the OCC referred the matter to the DOJ.
Although the Bank operates about 100 branches across six states, there are no allegations in the DOJ complaint relating to any market other than the Bank's self-designated Community Reinvestment Act “assessment area” in and around Houston. The allegations are fairly typical for redlining cases:
- Branch concentration in majority white neighborhoods
- Loan officers focusing on majority white neighborhoods
- Outreach and marketing targeted at majority white neighborhoods
- Disproportionately low numbers (compared with alleged peer lenders) of mortgage loan applications and mortgage loan originations in majority-black and majority-Hispanic neighborhoods
In addition, the DOJ's complaint (filed concurrently with the settlement announcement) also references additional alleged deficiencies that may signal the direction in which fair lending enforcement is going. These include alleged failures to “hire loan officers with ties or relationships to majority-Black and Hispanic areas” and “to train its loan officers or other staff to take steps to serve the credit needs of majority-Black and Hispanic areas.” Moreover, the DOJ's complaint references a lack of advertisements in Spanish, despite that over 700,000 people in the Houston area are Spanish-speaking with limited English proficiency.
The OCC's consent order contains a $3 million civil money penalty to be paid to the U.S. Treasury. Under the DOJ's settlement (subject to approval by the court), the Bank must invest $4.17 million in a loan subsidy fund for residents of predominantly black and Hispanic neighborhoods in the Houston area, $750,000 to develop community partnerships to increase access to residential mortgage credit in those neighborhoods, and at least $625,000 for advertising, outreach, consumer financial education and credit repair initiatives.
Why It Matters
This is the first of what we anticipate to be many fair lending enforcement actions under the Biden administration and the largest fair lending enforcement action in several years. The settlements also confirm that deficiencies in just one of many markets served by a lender can have substantial consequences. As noted, the settlement documents contain no reference to the Bank's activities in the other five states it serves, even though the OCC presumably considered those other areas in its fair lending examination.
If lenders were still waiting for a reason to be proactive in identifying and correcting potential fair lending issues, this is it. Qualitative fair lending reviews of policies, procedures and marketing should be conducted to identify issues that create fair lending risk. Quantitative statistical analyses of loan data, including comparisons to peer lenders, should also be run. The DOJ's complaint also alleges that it identified disparities in applications and originations between the Bank and its alleged peer lenders for a period of five years. Peer lending data is publicly accessible, so lenders do not have to wait for a potentially aggressive regulator to run the numbers. Risks can be identified and practices can be adjusted before the regulators arrive.
This case also highlights the importance of pre-acquisition due diligence. The Bank's alleged white-neighborhood-focused footprint in Houston apparently originated with a merger with another bank rather than because of deliberate branch-opening choices. Notwithstanding at least some efforts by the Bank to expand its minority neighborhood footprint as a result of the known imbalance caused by the merger, these enforcement actions ultimately followed. Entities therefore need to make fair lending evaluations, including census tract footprint analyses, a core part of pre-acquisition due diligence efforts; good faith fair lending efforts in the aftermath may not be enough to stave off scrutiny.
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