Beware of Banks and Non-Banks: New Types of Redlining Claims are on the Horizon | K&L Gates LLP


The message could not be clearer: Lenders, whether banking or not, should expect a wave of new redlining claims, including challenges to “modern” redlining, which “remains ubiquitous in the world. lending sector today ”, as well as all“ racist business practices ”, including those carried out by“ discriminatory algorithms ”.1

On Friday, October 22, 2021, Attorney General Merrick B. Garland announced the launch of a “Redness Initiative” (the Initiative), engaging the Department of Justice (DOJ or department), in partnership with d ‘other enforcement agencies, to “respond to -day redlining by making much more robust use of our fair lending authorities.” The new Deputy Attorney General for Civil Rights, Kristen Clarke, added: “[R]edlining is not a problem of a bygone era but a practice that remains ubiquitous in the credit industry today. The Office of the Comptroller of the Currency (OCC) and the Office of Consumer Financial Protection (CFPB) joined the announcement, with CFPB Director Rohit Chopra noting that the new initiative will expand the scope of activities assessed in part of a possible claim of redlining beyond those traditionally considered by the Department of Justice and that lenders should expect new challenges regarding the use of “discriminatory algorithms”.2

The Initiative responds to policy directives announced in the early days of the Biden administration that “the federal government has a critical role to play … in enforcing and enforcing federal civil rights and fair housing laws.”3 Earlier this year, the DOJ took action against an Atlanta bank to resolve redlining allegations and, in the wake of the announcement of the new initiative, the DOJ, CFPB and OCC announced a deal. to solve another redlining.4 action against Trustmark National Bank (Trustmark).5 These measures leave no doubt that the Department will continue to prioritize the fair application of loans. Regulators fear that minority communities will be harmed by a lack of access to credit, and all lenders should be made aware that redlining is a major focal point. Financial institutions responsible for complying with the Fair Housing Act and Equal Credit Opportunity Act would be well advised to take a proactive approach of performing a thorough risk assessment to ensure that appropriate measures are in place to minimize exposure to legal claims.

The Ministry’s Anti-Redlining Initiative

Redlining is an illegal practice whereby lenders avoid providing services to people living in certain communities because of the race, color or national origin of the people who live in those communities. Historically, red lines were drawn on maps to indicate areas in which credit services would not be provided. The Biden administration raised concerns about a possible modern day upload almost immediately after the transition, with the president issuing a memorandum in January 2021 stating that “[f]Federal policies have helped bring mortgages online and lending discrimination against people of color. The Ministry Initiative appears to provide a mechanism for the federal government to address the President’s concerns.

Although it is too early to know how the Initiative will be implemented in practice, the Ministry provided some details in its announcement. The Initiative “is informed by local expertise in housing markets and the credit needs of local communities of color”,6 suggesting a focus on neighborhood trends and perhaps partnerships with neighborhood organizations dedicated to equitable and affordable housing initiatives.7 The Department will strengthen its partnership with financial regulators responsible for fair oversight of loans, as well as state attorneys general responsible for enforcing state fair housing laws. But perhaps most noteworthy is the ministry’s announcement that it will extend its “analyzes of potential reduction to depository and non-depository institutions”.8

The expansion of redlining investigations to include non-bank lenders represents a radical change in the Department’s historical approach to investigating and enforcing redlining. Deposit-taking institutions are subject to the requirements of the Community Reinvestment Act (CRA), which requires banks to meet the needs of the communities they serve. Each CRA-regulated bank itself identifies the communities it serves by defining the bank’s “valuation area”, and federal regulators analyze this area it designates. However, since non-depository institutions are not governed by ARC, they are not required to define “areas of assessment”. The question then becomes: What geographic area will the Department and federal regulators use to assess the reclassification risks of non-depository institutions?

Interagency fair loan review procedures can provide guidance on this issue. They suggest that, regardless of the ARC valuation area, reviewers performing a “highlight benchmarking” might consider an institution’s “reasonably expected market area”.9 The concentration of the volume of non-bank applications and issues can also be significant. More than a year before the ministry announced its initiative, non-depository institutions received a strong signal from the CFPB when the agency filed a lawsuit in the Northern District of Illinois against Townstone Financial, Inc., a non-bank retail mortgage creditor. and broker, for alleged redlining in the Chicago Metropolitan Statistical Area.ten In the lawsuit, the CFPB alleges that “Townstone attracted over 90% of its mortgage applications for properties within the Chicago MSA,” indicating the importance of the lender’s application volume in identifying the geography.11

The National Bank Trustmark regulations

After announcing the Initiative, the Department, CFPB and OCC revealed an agreement to resolve allegations that Trustmark had engaged in bringing black and Hispanic majority areas of Memphis, Tennessee, online. The case reached the Ministry through a referral from the OCC and challenged practices from 2014 to 2018, stating that the historical nature of a violation is not foolproof to prevent public action. The complaint alleges that Trustmark located almost all of its branches and mortgage loan officers in predominantly white neighborhoods and maintained an inadequate fair loan compliance management system.

As part of the settlement, Trustmark agreed to invest US $ 3.85 million in a loan grant fund to increase credit to predominantly black and Hispanic areas; USD 400,000 on partnerships with community organizations to increase access to credit; and $ 200,000 per year in advertising / outreach / counseling in the Memphis lending area. Significantly, Trustmark has to pay civil fines to the OCC and CFPB totaling US $ 5 million.

The Trustmark action represents the second redlining action taken by the ministry during the Biden administration. In August 2021, the ministry and the OCC took action against Cadence Bank to resolve allegations of minority communities going online in Houston, Texas.

Key takeaways for institutions responsible for fair loan compliance

In line with the Biden administration’s policy guidelines, the ministry and regulators have made it clear that going live is an enforcement priority. There is likely to be more application of redlining on the horizon, and bank and non-bank lenders should expect redlining to be a focal point for regular reviews. Institutions must intend to ensure that they contribute to meeting the credit needs of all parts of the communities in which they operate. Particularly in light of the details provided to date regarding the Initiative, institutions should consider localized efforts to penetrate minority neighborhoods, including partnerships with community organizations to increase access to credit as well as advertising and distribution. positive awareness. Establishments that maintain physical presences should be mindful of policies and practices related to site opening, site closure, modification of services available at sites, and site staffing. Institutions that take a proactive approach to assess current (and historical) fair lending risks and ensure adequate internal controls over fair lending will be in a better position to implement corrective actions and mitigate any risk of potential claims.

1 Press release, Dep’t of Just., The Ministry of Justice announces a new initiative to fight against redlining (October 22, 2021).

2 Username.

3 Memorandum on Repairing the History of Discriminatory Housing Practices and Policies of Our Country and the Federal Government (January 26, 2021).

4 United States of America v. Cadence Bank, NA, Civil Action # 1: 21-mi-99999-UNA, in United States District Court for the Atlanta Division of the Northern District of Georgia, filed August 30, 2021, available here.

5 United States of America v. National Bank Trustmark, Civil Action No. 2: 21-cv-2664, in the United States District Court for the Western District of Tennessee, Western Division, filed October 22, 2021, available here.

6 Memorandum on Repairing the History of Discriminatory Housing Practices and Policies of Our Country and the Federal Government, above note 3.

7 Dep’t of Just., The Department of Justice announces a new initiative to combat redlining, above note 1.

8 Username.

9 Office of the Comptroller of the Currency, Fed. Deposit Ins. Corp., Fed. Reserve Bd., Office of Thrift Supervision, Nat’l Credit Union Admin., Interagency Fair Trade Loan Review Procedures, August 2009, available here.

ten Townstone Financial, Inc. and Barry Sturner, END OF CONSUMERS. PROT. OFFICE, available here (last visit on October 26, 2021).

11 Consumer Affairs Office End. Prot. v. Townstone Fin., Inc., Civil Action No. 1: 20-cv-04176, in United States District Court for the Eastern Division of the Northern District of Illinois, filed July 15, 2020, available here.

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