The CFPB, DOJ, and Hudson City Savings Bank, F.S.B. (“Hudson City”) recently entered into the largest residential mortgage redlining settlement in DOJ history. On September 24, 2015, the parties filed a Joint Motion for Entry of Consent Order that resolves allegations of discriminatory practices of redlining in predominately Black and Hispanic neighborhoods. The consent order requires Hudson City, among other things, to spend over $30 million on loan subsidies, penalties and other programs, open new branches, and contract with third party consultants to ensure certain compliance standards. Hudson City’s settlement is another reminder that the CFPB will not hesitate to scrutinize the impact of a lender’s actions, not merely the actions alone.

In its complaint, the CFPB alleged that Hudson City violated the Equal Credit Opportunity Act (“ECOA”) and the Fair Housing Act (“FHA”) by discouraging applicants in affected metropolitan statistical areas (“Affected MSA’s”), which include majority Black and Hispanic neighborhoods (“Affected Neighborhoods”), from applying for residential mortgages. Hudson City allegedly (1) placed the vast majority of its branches and loan officers outside of Affected Neighborhoods, (2) excluded Affected Neighborhoods from Hudson City’s Community Reinvestment Act (“CRA”) assessment, (3) selected mortgage brokers who were located outside of Affected MSA’s, and (4) focused its marketing efforts on neighborhoods with relatively few Black and Hispanic residents. According to government data, 121 out of 135 Hudson City branches are located outside of Affected MSA’s, only 12 out of 162 Hudson City brokers are located in Affected MSA’s, Hudson City excluded a large number of counties with high proportions of Affected MSA’s from its CRA assessment, and “failed to advertise meaningfully” in Affected Neighborhoods. The DOJ and CFPB found it important that only 4.8 percent of loan applications Hudson City received from 2009-2013 were for properties in Affected Neighborhoods even though 35.9 percent of the Affected MSA’s are Affected Neighborhoods. In addition, the agencies emphasized that Hudson City’s peers (who are not identified) generated 13 percent of their applications from those same neighborhoods.

To avoid the costs of litigation and any admission of wrongdoing, Hudson City agreed to (among other things):

  1. invest $25,000,000 in a loan subsidy program to increase credit extended in Affected Neighborhoods;
  2. pay a civil penalty of $5,500,000 to the CFPB;
  3. spend a minimum of $750,000 on partnerships with community-based organizations in Affected Neighborhoods to assist in revitalizing the particular areas;
  4. spend a minimum of $200,000 per year on targeted advertising and an outreach campaign;
  5. spend a minimum of $100,000 per year on specific financial education programs;
  6. open or acquire two new full-service branches within minority neighborhoods;
  7. hire or designate a full-time director of community lending;
  8. propose an independent third party consultant to who will perform an assessment of community needs and submit a written report to the DOJ and the CFPB within a certain number of days;
  9. contract with an independent third party consultant to provide an assessment of Hudson City’s redlining compliance program, and prepare a written report and separate compliance plan; and
  10. provide specific redlining training to all covered employees.

In the current climate, lenders must be aware of the potential effects their actions have, or could have, on a borrower’s decision to apply for credit. Although statistical analysis is often construed in a manner benefitting the government, it is important for lenders to conduct their own analysis and to continually evaluate their marketing efforts, branch locations, broker locations, employee training and compliance programs in an effort to ensure equal access to credit and to prepare for the unavoidable investigation.