On September 24, 2015, the US Department of Justice (DOJ), the Bureau of Consumer Financial Protection (CFPB), and Hudson City Savings Bank (Bank) entered into a consent order which, if approved by the court, would settle allegations that the Bank violated the Equal Credit Opportunity Act and the Fair Housing Act (FHA). The consent order is the latest in a series of actions taken by a number of regulators on both the state and federal level settling allegations of redlining based largely on statistical analysis rather than evidence of denied loans.1
The recent settlement was the result of investigations by DOJ and CFPB into the Bank's lending practices in certain majority-Black and Hispanic areas within the metropolitan statistical areas served by the Bank from 2009 to 2013. Specifically, the agencies alleged that the Bank, through its marketing practices, choice of Community Reinvestment Act (CRA) assessment area, and selection of branch locations and brokers, failed to provide access to credit in certain majority-Black and Hispanic neighborhoods.
The novel legal theories used by the DOJ and CFPB in the case continue to signal a major change in the way the law is being interpreted and applied. This change may require banks to rethink and reconfigure their fair lending compliance efforts to include additional loan origination, increased visibility through (i) community outreach, including financial literacy programs; (ii) partnerships with community development and religious organizations; and (iii) establishing branch offices in majority-minority census tracts across a broader geographic footprint than existing CRA assessment areas.
The consent order is the first public settlement of a joint redlining investigation by DOJ and CFPB. As such, the structure of the order and the remedial actions the Bank will be required to undertake are likely a preview of other redlining investigations currently underway at the agencies. In addition, all institutions should take note of the novel policy positions taken by DOJ and CFPB in the order when evaluating their own fair lending risk -- particularly the agencies' heavy reliance on statistical analysis and an unwillingness to consider the institution's purchased loan activity.
In crafting the case against the Bank, the agencies relied heavily on an analysis of the residential mortgage applications received by the Bank vis-à-vis its peers, as well as the Bank's decisions regarding branches and CRA. In so doing, the agencies failed to consider the Bank's significantly higher than average approval rate and substantial loan purchase activity in the identified census tracts. The complaint alleges that:
- The Bank drew 4.8 percent of its applications in the NY/NJ MSA from majority-Black and Hispanic areas, while the Bank's peers drew 13.2 percent from the same areas.
- While Hudson City drew only 1.5 percent of its applications from what the agencies termed "high Black-and-Hispanic areas" of the NY/NJ MSA (in which more than 80 percent of the residents are Black or Hispanic), the Bank's peers generated 6.6 percent.
- The Bank's branching strategy "form[ed] a semi-circle around the four counties in New York State with the highest proportions of majority-Black-and-Hispanic neighborhoods."
- The Bank "discouraged lending in majority-Black-and-Hispanic neighborhoods by excluding most of the majority-Black-and-Hispanic neighborhoods in the NY/NJ and Camden MSAs" from its CRA assessment area.
As a result of this new approach, particularly the focus on applications, institutions must ensure not only that they treat all applicants fairly, but that they are affirmatively drawing business from majority-minority areas and comparing their performance to that of their peers. Moreover, the focus on "high Black-and-Hispanic areas" suggests that DOJ, for the first time, is requiring banks to evaluate their lending activity in these specific areas in order to achieve compliance with the law.
Under the consent order, the Bank must:
- Establish a US$25 million loan subsidy program, no more than US$18,750 of which may be used to assist any one borrower, to provide residents of majority-Black and Hispanic neighborhoods in targeted areas mortgage loans with closing cost assistance, down payment assistance, or a lower interest rate.
- Pay a US$5.5 million civil money penalty to the CFPB.
- Open two full-service branches in majority-Black and Hispanic areas.
- Conduct fair lending training for employees involved in mortgage lending.
- Hire an outside consultant to conduct assessments of the Bank's redlining risk and the credit needs of the majority-Black and Hispanic neighborhoods in the target areas.
- Modify the Bank's CRA assessment area to include additional areas with significant minority populations.
- Spend US$200,000 per year the consent order is in effect on an advertising and outreach program to generate mortgage loan applications from the targeted areas.
- Spend US$100,000 per year the consent order is in effect on financial education programs in majority-Black and Hispanic neighborhoods in the targeted areas.
- Spend US$750,000 over the course of the consent order in partnering with community organizations that provide certain grants and/or credit, financial homeownership, or foreclosure prevention services to majority-Black and Hispanic neighborhoods in the targeted areas.
The order is one of the first redlining enforcement actions announced after the Supreme Court's decision in Inclusive Communities, in which the Court cautioned that, at least with respect to disparate impact cases brought under the FHA, a plaintiff cannot simply allege that statistical evidence shows a disparate impact. Rather, the plaintiff must demonstrate that a policy or practice of the defendant caused the differing outcomes. Moreover, the policy or practice must present "artificial, arbitrary, and unnecessary barriers."
Although traditionally redlining is considered disparate treatment, the complaint does not state the government's theory of liability (whether impact or treatment). However, DOJ and CFPB rely heavily on a statistical analysis of the Bank's mortgage application data, while declining to identify consumers who were harmed or a causal link between the two. As such, it appears, as many observers had predicted, that any benefit from the heightened standard articulated in Inclusive Communities would have to come through litigation. In the meantime, financial institutions remain exposed to claims of fair lending violations based largely on statistical analysis.
Perhaps more concerning is the refusal by the agencies to consider the Bank's substantial loan purchase activity. During the period under investigation, the Bank, like many institutions, supplemented its physical presence in minority areas by purchasing loans originated by other institutions in order to ensure access to credit in those areas. Indeed, purchasing loans in minority areas (thereby providing liquidity to the originating institution to originate more loans in the affected areas) has long been considered an acceptable method for fulfilling an institution's obligations under the CRA. Examiners at the banking agencies and the CFPB are also required to consider purchased loans during the scoping process and "redlining" analysis of an institution's fair lending examination.2However, in the ultimate statistical analysis used to allege that the Bank engaged in redlining, the agencies declined to consider the Bank's purchased loan activity. Nor will any future purchased loan activity be considered toward the Bank's compliance with the Consent Order.
As a result of the recent enforcement activity of the CFPB and DOJ, financial institutions should carefully consider not relying too heavily on purchased loan activity when evaluating compliance with the fair lending laws, and instead concentrate more efforts in loan origination. Further, financial institutions should be conducting their own statistical analyses of applications received from and loan originations to consumers in majority- and high-minority neighborhoods within their CRA Assessment areas, branch network, and lending footprint.