On June 8, 2016, the U.S. Department of Housing and Urban Development (HUD) announced a conciliation agreement with a bank, resolving allegations that the bank engaged in discrimination by denying the mortgage applications of African-American and Hispanic applicants at a disproportionally higher rate than white applicants.  The complaint, filed on December 23, 2011, resulted from a HUD review of the bank’s 2010 Home Mortgage Disclosure Act (HMDA) data.  During its investigation, HUD analyzed mortgages that were first denied by an automated underwriting system (AUS), and then manually underwritten, and determined that white applicants received unjustified preferential treatment in the manual underwriting process in violation of the Fair Housing Act.

Although neither the conciliation agreement nor HUD’s press release on the settlement mentioned redlining, the settlement terms included provisions typically associated with resolving redlining claims.  As part of the settlement, the bank agreed not to engage in discriminatory practices on the basis of race or national origin relating to a residential real-estate transaction, including soliciting applications for loans, the manual underwriting of credit, and providing residential loans.  The agreement also prohibited the bank from discriminating in (i) the selection of sites for and the provision of services at branch offices, (ii) marketing, and (iii) demarcating Community Reinvestment Act assessment areas.

The bank additionally committed to creating a uniform and objective set of guidelines for the secondary review of retail channel residential loan applications initially denied by the AUS  to ensure that the bank’s manual underwriting activities are nondiscriminatory.  It agreed to hire three mortgage banker market specialists to focus on diverse lending in specific counties in South Carolina, and to provide at least 50 special purpose credit loans or obtain at least 125 completed special purpose credit applications in those counties.  The conciliation agreement will also require 4 hours of fair lending training for the bank’s employees and agents substantially involved in the manual underwriting of mortgages, and the bank must conduct financial education programs in the state through partnering with non-profit organizations or community groups.  Finally, the bank must provide at least $140,000 to nonprofits that provide credit and housing counseling, financial literacy, and other programs for first-time homebuyers in South Carolina, and $20,000 for marketing and outreach to residents in majority-minority census tracts in the state.

Among other matters, the settlement underscores the importance of closely monitoring manual decision making for potential fair lending risk.