Key Takeaways

  • The Department of Justice (“DOJ”) recently announced a new initiative to aggressively pursue lenders who engage in the discriminatory practice of “redlining.”
  • The DOJ, along with the Consumer Financial Protection Bureau (“CFPB”) and the Office of the Comptroller of the Currency (“OCC”), plans to utilize U.S. Attorneys’ Offices, State Attorneys General, and financial regulators to implement the new initiative.
  • In view of the growth of non-depository lenders in the industry, the DOJ will focus enforcement efforts on both depository and non-depository institutions.
  • The initiative also may target more “modern” forms of redlining, such as the use of algorithms that lead to unequal access to lending services.
  • Reflective of this initiative, the DOJ recently announced a multi-million-dollar settlement resolving allegations that Tennessee-based Trustmark National Bank engaged in redlining. That resolution comes on the heels of Atlanta-based Cadence Bank’s redlining settlement with federal authorities.

Introduction

Redlining is a form of discrimination under the fair-housing laws whereby lenders deny loans and services to people in certain areas based on the race, color, or national origin of the people living in those communities.1 The practice has long been recognized to violate both the Fair Housing Act and Equal Credit Opportunity Act.2 After President Joseph Biden took office in January 2021, he announced the intention for his Administration to combat redlining to “advance[e] racial equity” and support “underserved” communities.3 The DOJ is following through on this White House plan by organizing a new multi-agency initiative to aggressively enforce federal law prohibiting redlining.4

The DOJ’s “Combating Redlining Initiative”

On October 22, 2021, Attorney General Merrick Garland announced the DOJ’s Combating Redlining Initiative (the “Initiative”), by which “the Civil Rights Division will partner with U.S. Attorney’s Offices . . . [to] mobilize resources focused on making fair access to credit a reality in underserved neighborhoods across our country.”5 Attorney General Garland described the Initiative as “the department’s most aggressive and coordinated effort to address redlining” and stated that the DOJ “will seek to address fair lending concerns on a broader geographic scale than” ever before.6

New Partnerships. To pull that off, the DOJ, the CFPB, and the OCC will work closely with U.S. Attorneys’ Offices as well as State Attorneys General and financial regulators.7 The DOJ plans to encourage these partners to provide “local expertise on housing markets and the credit needs of local communities of color.”8 Of note, the Initiative will also expand the traditional scope of redlining enforcement to non-depository institutions, which “are not traditional banks and do not provide typical banking services, but engage in mortgage lending and now make the majority of mortgages in [the United States].”9

“Digital Redlining.” The Initiative also will expand enforcement in other ways. Notably, it will scrutinize lenders’ algorithms in order to target so-called “digital redlining.”10 CFPB Director Rohit Chopra identified this as a priority and cited studies concluding there was an algorithmic bias against Black mortgage applicants.11 The CFPB also has recently expressed a willingness to pursue a broader “discouragement” theory of redlining. Under this more expansive “discouragement” theory, the CFPB may evaluate the entirety of a lender’s practices, including their marketing strategies and the racial makeup of their employees, to determine whether such practices might discourage reasonable people in minority neighborhoods from seeking credit, a mortgage, or other services.12 Even lenders who treat white and minority prospective customers equally may be open to redlining risks under this theory. For example, the CFPB has said that, in its view, sending marketing materials to all prospective customers that feature only white models and white employee headshots could support a redlining claim because the materials could be viewed as discouraging minority applicants from seeking a lender’s services.13

Recent Enforcement

On the same day the Attorney General announced the Initiative, the DOJ, U.S. Attorney’s Office for the Western District of Tennessee, CFPB, and OCC also announced a major redlining settlement with Trustmark National Bank.14 The DOJ and CFPB sued Trustmark in the U.S. District Court for the Western District of Tennessee based on an initial investigation from the OCC.15 The settlement resolved allegations that Trustmark had engaged in redlining of predominately Black and Hispanic neighborhoods in Memphis, Tennessee between 2014 and 2018.16 Specifically, the DOJ alleged

that Trustmark’s branches were concentrated in majority-white neighborhoods, that the bank’s loan officers did not serve the credit needs of majority-Black and Hispanic neighborhoods, that Trustmark’s outreach and marketing avoided those neighborhoods, and that Trustmark’s internal fair-lending policies and procedures were inadequate to ensure that the bank provided equal access to credit to communities of color.17

According to the DOJ and CFPB, Trustmark maintained just four of its 25 branches in majority-Black and Hispanic neighborhoods and did not have any mortgage loan officers in those four branches.18 Trustmark also allegedly received far fewer home mortgage loan applications and issued fewer residential mortgage loans to residents in predominately Black and Hispanic neighborhoods compared to its peers.19

Under the terms of the settlement, Trustmark agreed to pay US$5 million in civil penalties to the CFPB and OCC, and “invest US$3.85 million in a loan subsidy fund to increase credit opportunities for current and future residents of predominantly Black and Hispanic neighborhoods in the Memphis area.”20 It will also “devote US$400,000 to developing community partnerships to provide services to residents of majority-Black and Hispanic neighborhoods in Memphis that increase access to residential mortgage credit” and “at least US$200,000 per year to advertising, outreach, consumer financial education and credit repair initiatives in and around Memphis.”21

In addition, Trustmark must employ at least four mortgage loan officers or community lending specialists in the affected neighborhoods “and open a loan production office in a majority-Black and Hispanic neighborhood in Memphis.”22 In the wake of this settlement, Trustmark also established “a Fair Lending Oversight Committee and designated a Community Lending Manager” who will work closely with the bank’s management to oversee implementation of the settlement.23

Trustmark has not been the only target of recent federal redlining enforcement. In August, the DOJ announced a redlining settlement with Atlanta-based Cadence Bank that will require Cadence to “invest over US$5.5 million to increase credit opportunities for residents of majority-Black and Hispanic neighborhoods in Houston.”24

The DOJ has stated that it has several open redlining investigations. In view of the Initiative, lenders may expect to see more investigations and enforcement in the coming months and years.

Impact on Financial Institutions

Depository and non-depository institutions should take seriously Assistant Attorney General Kristen Clarke’s warning that the Initiative sends a “strong message to banks and lenders that we will hold them accountable.”25 The DOJ and the CFPB clearly plan to review existing lending practices for redlining and may be expected to adopt an aggressive view concerning which lending practices run afoul of fair-housing laws. In evaluating existing practices, lenders may look to the DOJ’s and CFPB’s public statements, the existing regulations, and the Trustmark and Cadence settlements for guideposts concerning how these agencies are likely to interpret federal redlining laws.

The Trustmark settlement serves as a reminder that the DOJ will continue using traditional tools to identify redlining. For example, although many lenders are providing more services online, those with physical locations must consider the distribution of their lending offices among predominately white communities and communities of color. The DOJ will also continue comparing lenders’ practices to their peers to identify redlining. These comparisons may prove particularly important for non-depository lenders that do not always service clearly defined geographical areas. Lenders should remain mindful of these traditional analytical tools as the government ramps up its efforts to identify and address redlining.

CFPB Director Chopra’s remarks also signal an expansion in the federal government’s view as to what constitutes redlining.26 Lenders should ensure that seemingly neutral practices—such as using algorithms to evaluate mortgage applicants—are not producing disparate results among applicants from predominately white communities and applicants from communities of color who otherwise have similar credit backgrounds. Director Chopra stated that claims of insufficient data or lack of knowledge of an algorithm’s inner workings will not be viewed as an acceptable defense to this so-called “digital redlining.”27 Institutions should also proactively assess their business and marketing practices to mitigate or eliminate the redlining risks under the CFPB’s “discouragement” theory.