Three federal agencies announced a coordinated settlement today with a Mississippi-headquartered bank for allegedly redlining predominantly Black and Hispanic neighborhoods in the Memphis, Tennessee area. The action was the result of the OCC's examination of the bank's lending activities from 2014 to 2016. The OCC found that the bank had engaged in a "pattern or practice" of discrimination in violation of the Fair Housing Act, which prompted OCC to refer the matter to the Department of Justice and CFPB for investigation last year.
The bank allegedly denied residents of majority-minority and high-minority neighborhoods in Memphis equal access to mortgage loans, which the OCC said was evidenced through the bank's mortgage application and origination activity, branching, loan officer operations, and marketing. As a result, the OCC assessed a $4 million civil money penalty.
In a separate but related action, the CFPB and the Justice Department together alleged that the bank violated the Fair Housing Act and Equal Credit Opportunity Act by avoiding mortgage lending in majority-Black and Hispanic neighborhoods, thereby discouraging prospective applicants residing in, or seeking credit for properties located in, these neighborhoods from applying for credit.
As evidence supporting these claims, the government pointed to the bank's:
- Branch locations.
Only four of the bank's 25 branches in the Memphis area were located in majority-Black and Hispanic communities, whereas 50% of the census tracts in the Memphis MSA are majority-Black and Hispanic. According to the settlement, two of the four branches were originally in white neighborhoods and are only now in majority-minority neighborhoods because of shifting demographics. The bank also closed a limited-service branch located in a majority-minority neighborhood in 2015.
- Loan officer assignments.
No loan officers were assigned to any of the four branches in majority-minority areas, so mortgage-lending services were not available to walk-in customers. The CFPB found it significant that the bank relied almost entirely on its loan officers (onsite at other branches) to conduct outreach to potential customers.
- Inadequate monitoring.
Before the OCC began its exam in 2018, the bank did not conduct comprehensive fair lending risk assessments or establish internal governance to oversee fair lending.
- Disproportionately low application volume.
From 2014 to 2018, other similarly situated lenders (i.e., "peer" financial institutions that received between 50% and 200% of the bank's annual volume of applications) generated 2.5 times more home mortgage loan applications from majority-Black and Hispanic neighborhoods in the Memphis MSA than the bank.
As part of the CFPB/DOJ settlement, the bank is ordered to pay a $5 million penalty to the CFPB, which will credit the $4 million penalty collected by the OCC toward the satisfaction of this amount. The bank also must invest $3.85 million in a loan subsidy program to assist borrowers purchasing properties in majority-Black and Hispanic neighborhoods in Memphis, and allocate $200,000 towards targeted advertising. It will also open a new lending office in a majority-Black and Hispanic neighborhood.
We expect to see a significant uptick in fair lending enforcement from each of these agencies, as the Justice Department took this opportunity to announce the launch of its new "Combatting Redlining Initiative" today. The Department's initiative will be led by the Civil Rights Division's Housing and Civil Enforcement Section in partnership with U.S. Attorney's Offices. One notable aspect of this initiative is that the Department specifically called out non-bank mortgage lenders, which were not traditionally the targets of redlining enforcement. The Department also noted its intention to increase coordination with State Attorneys General on potential fair lending violations.
For the CFPB's part, today's settlement marked the first fair lending enforcement action under new director Rohit Chopra, who has made clear that he will have a fair lending-focused agenda. Earlier this week, news broke that Chopra will name Eric Halperin to head the CFPB's enforcement division. Halperin is a long-time civil rights lawyer who served under Tom Perez as a special fair lending counsel in the DOJ's Civil Rights Division at a time when the DOJ was active in pursuing "reverse redlining" claims. With Halperin's civil rights background, we can expect to see even more attention given to fair lending enforcement.
We also can expect to see a return to strongly worded CFPB press releases. The Bureau's announcement of the settlement characterizes the bank's violations as "deliberate," with Chopra stating that the bank "purposely excluded and discriminated against Black and Hispanic communities." Although unrelated to the settlement, he also returned to a topic he has raised before—algorithmic bias: "The federal government will be working to rid the market of racist business practices, including those by discriminatory algorithms."
With markedly increased attention at the federal level, and a promise of coordination with the states, all lenders should take note of today's action and review their own application and origination activity as well as policies, procedures, and monitoring for compliance with fair lending laws.
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