The Biden Administration’s prioritization of fair lending as a law enforcement focus took center stage last week with the announcement that the U.S. Department of Justice (DOJ) has launched a new initiative targeting redlining and that the DOJ and CFPB, in cooperation with the OCC, had settled the first lawsuit filed under the Initiative.
New DOJ Initiative. According to the DOJ, its new “Combatting Redlining Initiative” represents its “most aggressive and coordinated enforcement effort to address redlining” and “will seek to address fair lending concerns on a broader geographic scale than the [DOJ] has ever done before.” The initiative will be led by the DOJ’s Civil Rights Division’s Housing and Civil Enforcement Section in partnership with U.S. Attorney’s Offices. DOJ intends to use U.S. Attorneys’ Offices “as force multipliers to ensure that fair lending enforcement is informed by local expertise on housing markets and the credit needs of local communities of color.”
Significantly, the DOJ made clear that it plans to target not only redlining by depository institutions but to also look for potential redlining by non-depository institutions which, according to the DOJ, now make the majority of mortgages in this country and would include “all types of lenders of all sizes.” It is also significant that the DOJ plans to strengthen its partnership with financial regulatory agencies to ensure the identification and referral of fair lending violations to the DOJ and to increase coordination with state Attorneys General on potential fair lending violations.
In his remarks at the joint press conference with the DOJ and OCC announcing these developments, new CFPB Director Rohit Chopra noted that the Bureau would also be “closely watching for digital redlining, disguised through so-called ‘neutral algorithms.’” Although he noted that algorithms can often help eliminate bias, “black-box underwriting decisions are not necessarily creating a more level playing field and may be exacerbating the bias feeding into them,” and that “the speed at which banks and lenders are turning lending and marketing decisions over to these algorithms is concerning to me.”
Trustmark National Bank Settlement. The DOJ, CFPB, and OCC, announced they had entered into agreements with Trustmark National Bank (TNB) to resolve allegations that TNB engaged in lending discrimination by redlining predominantly Black and Hispanic neighborhoods in Memphis, Tennessee. Simultaneously with the filing of a joint complaint by the DOJ and CFPB against TNB in a Tennessee federal district court, the parties filed a consent order with the court and the OCC issued an administrative consent order.
Trustmark is a national bank headquartered in Jackson, Mississippi with 196 branches in five southern states. It currently operates 22 branches in the Memphis metropolitan area. In April 2020, the OCC referred the matter to the DOJ after information gathered during a 2018 fair lending examination suggested that TNB had engaged in unlawful redlining between 2014 and 2016. Investigations were opened by both the OCC and the CFPB.
The joint complaint is brought under the Fair Housing Act (FHA), the ECOA, and the CFPA. (The FHA claim is made only by the DOJ, the ECOA is made by both the DOJ and CFPB, and the CFPA claim is made only by the CFPB.) It alleges that, from 2014 to 2018, TNB engaged in unlawful redlining in the Memphis, Tennessee-Mississippi-Arkansas Metropolitan Statistical Area (Memphis MSA) by structuring its mortgage operations to avoid serving the credit needs of, and discourage those residing or seeking credit in, majority-Black and Hispanic census tracts from obtaining mortgage loans, while acting to serve the credit needs for mortgage loans in majority-white census tracts. The primary specific allegations relating to the relevant time period include that TNB:
- Maintained only 3 full-service branches in majority-Black and Hispanic census tracts and 15 full-service branches in majority-white tracts
- Assigned all of its mortgage loan officers to its branches in majority-white areas and did not assign a single loan officer to any of TNB’s branches located in majority-Black and Hispanic neighborhoods
- Relied almost entirely on mortgage loan officers to develop referral sources, conduct outreach to potential borrowers, and distribute marketing materials related to TNB’s mortgage lending services.
- Did not monitor or document where its loan officers developed referral sources or to whom they distributed marketing or outreach materials to ensure that such sources or distribution occurred in all neighborhoods in the Memphis MSA
- Used a marketing strategy in the Memphis MSA that was focused on developing commercial business, with the majority of print or digital advertising appearing in business-focused publications distributed primarily in majority-white neighborhoods while knowing that this focus was ineffective in generating mortgage loan applications from majority-Black and Hispanic neighborhoods in the Memphis MSA
- Made a smaller percentage of HMDA-reportable residential mortgage loans in majority-Black and Hispanic neighborhoods compared to its peers
- Had internal fair-lending policies and procedures that were inadequate to ensure that TNB was positioned to provide equal access to credit to majority-Black and Hispanic neighborhoods in the Memphis MSA
The proposed consent order requires TNB to pay a $5 million civil money penalty to the CFPB, with the amount payable to the CFPB to be remitted by $4 million upon TNB’s satisfaction of its obligation to pay a civil money penalty in that amount to the OCC (see below). TNB must also:
- Establish a $3.85 million loan subsidy program that will offer loans to qualified applicants on a more affordable basis when borrowing to purchase properties in majority-Black and Hispanic neighborhoods in Memphis. The subsidies can include closing cost assistance, down payment assistance, and payment of mortgage insurance premiums
- Open a new mortgage loan production office in a majority-Black and Hispanic census tract within the Memphis metropolitan area and fund $200,000 in targeted advertising per year to generate applications for mortgage loans in majority-Black and Hispanic neighborhoods
- Take remedial steps such as fair lending training of employees to improve its fair lending compliance and serve the credit needs of majority-Black and Hispanic neighborhoods in the Memphis metropolitan area
In addition to the proposed consent order filed by the DOJ and CFPB with the federal district court, the OCC issued an administrative Consent Order against TNB. The order assesses a $4 million civil money penalty against TNB for engaging in violations of the FHA. Unlike the DOJ/CFPB consent order which includes no specific findings that TNB engaged in redlining, the Comptroller’s findings set forth in the OCC Consent Order include that TNB engaged in a pattern or practice of violating the FHA by reason of having engaged in redlining.