Redlining Enforcement Actions Are Becoming a Point of Emphasis

In what many suggest may be the tip of the iceberg, the Department of Justice and CFPB have partnered together to enter into a proposed consent order with Hudson City Savings Bank resolving allegations that the bank engaged in a pattern or practice of redlining predominantly black and Hispanic neighborhoods in its residential mortgage lending practice.  The consent order, if approved, would be the largest redlining settlement in history to provide direct subsidies, according to the CFPB.  The settlement follows a 2014 CFPB investigation into the bank’s mortgage lending practices and a subsequent referral to the Department of Justice.

The complaint alleges that between 2009 and 2013, the bank’s policies and procedures discouraged consumers in majority Black-and-Hispanic neighborhoods from applying for credit from the bank and therefore violated the Equal Credit Opportunity Act and the Fair Housing Act.  Both Acts prohibit discrimination based upon race, color and national origin.  The agencies alleged that the bank placed its branches and loan officers principally outside of majority Black-and-Hispanic neighborhoods, excluding majority-Black-and-Hispanic neighborhoods from its Community Reinvestment Act assessment areas, selecting mortgage brokers that were mostly outside of and did not effectively serve the majority Black- and-Hispanic neighborhoods and focusing its marketing efforts on neighborhoods with relatively few Black and Hispanic residents. More specifically, the CFPB and Department of Justice contended:

• The bank engaged in a branch expansion and acquisition strategy that excluded and formed a “semi-circle around the four counties in New York State with the highest proportions of majority-Black-and-Hispanic neighborhoods”;  
• A significant disparity existed between the applications the bank derived from majority-Black-and-Hispanic tracts in their metropolitan statistical areas (“MSAs”) when compared to those derived from the bank’s peers in the same areas;
• The bank generated 80% of their mortgage applications from brokers and the bank’s broker network was heavily concentrated outside of majority-Black-and-Hispanic areas;
• The bank discouraged lending in majority-Black-and-Hispanic neighborhoods by excluding most of the majority-Black-and-Hispanic neighborhoods in two of its MSAs from its Community Reinvestment Act assessment areas;
• The bank engaged in limited marketing outside of its branch network and failed to meaningfully advertise in majority-Black-and-Hispanic neighborhoods;
• The bank failed to adequately oversee or hire sufficient staff to ensure fair lending compliance and had no written policies or procedures to monitor for compliance; and
• The CFPB made recommendations to the bank in 2012 that it begin monitoring at least its top 10 brokers for loan volume and the bank failed to do so.

The bank, while neither admitting nor denying the allegations of the complaint, entered into the consent order “solely for the purpose of avoiding contested litigation with the United States and the Bureau, and to instead devote its resources to providing fair credit services to eligible persons, and to providing important and meaningful assistance to borrowers in certain markets.”  The bank further contended that it believed it was satisfying its obligations to meet the credit needs of majority Black-and-Hispanic neighborhoods by purchasing mortgages that were secured by residential properties in majority Black-and-Hispanic neighborhoods.  

The consent order requires the bank:

• Pay a $5.5 million penalty to the CFPB;
• Invest $25 million in a loan subsidy program which will offer residents in majority-Black-and-Hispanic neighborhoods within the bank’s MSAs home mortgage loans on a more affordable basis than otherwise available from the bank, including subsidizing home mortgage loans to “qualified applicants” as the term is defined in the Consent Order;
• Spend at least $750,000 to partner with local community based organizations in the redlined communities to provide financial or other assistance to residents;
• Spend at least $100,000 annually (for five years) to sponsor consumer financial education programs, including the sponsorship of a minimum of twelve events per year;
• Spend at least $200,000 annually (for five years) on a targeting advertising company that advertises the loan subsidy program and is targeted to generate loan applications from majority Black-and-Hispanic neighborhoods;
• Open or acquire two new branches within majority-Black-and-Hispanic neighborhoods in the affected MSAs, with the mandate that the branches be full service retail branches accessible to concentrations of owner-occupied residential properties that will accept first-lien mortgage applications;
• Revise its CRA areas to include specifically all of Bronx, Queens, Kings and New York counties in New York, the city of Camden NJ, and the city of Philadelphia, PA;
• Hire a third party consultant to assess and revise the bank’s compliance management system with respect to redlining and submit to the CFPB and Department of Justice a written compliance plan with respect to fair lending compliance and training; and
• Hire a third party consultant to assess the credit needs of majority-Black-and-Hispanic neighborhoods within the bank’s MSAs and submit a remedial plan to the CFPB and Department of Justice that details the bank’s plan to implement the remedial goals of the consent order.

So what can other banks learn from this consent order?

• First and foremost, redlining is not an express discrimination but an implied discrimination based upon the totality of the circumstances.  Banks, therefore need to review their loans, applications, branch placement, loan availability and advertising efforts from a similar view point; 
• Banks need to review and analyze HMDA, demographic and geographic data to ascertain their geographic and market impact and identify redlining risks;
• Banks need to make sure they have an effective compliance management plan in place which:
  • Provides for monitoring of branch and broker loan activities;
  • Statistically monitors for redlining risk (see above), including statistical peer analysis of applications and originations from minority neighborhoods within the bank’s MSAs; and
  • Provides for effective fair lending training of all impacted employees; and
• Banks need to adequately staff for fair lending.

The answer to the big question of whether redlining will remain an enforcement focus is likely a “yes.”  The Department of Justice has noted in recent speeches that it is seeing a trend of increased red lining practices and this trend is likely to lead to further enforcement actions and settlements like the one entered into by Hudson City Savings Bank.