Inside the Justice Department’s Major Fair-Lending Enforcement Push

Federal attack on 'modern redlining' begins a key administration effort, including the belief that artificial intelligence will exacerbate lending discrimination and redlining. During DOJ's announcement of the new strategy the government also unveiled a fair-lending settlement.

The Department of Justice has followed through on a key plank in the Biden campaign platform, with the announcement of a renewed effort to enforce federal fair-lending laws.

The announcement specifically launched the Combatting Redlining Initiative and focused on mortgage lending specifically. Attorney General Merrick Garland said that “we are committing ourselves to addressing modern-day redlining by making far more robust use of our fair-lending authorities.”

“We know well that redlining is not a problem from a bygone era but a practice that remains pervasive in the lending industry today,” stated Kristen Clarke, Assistant Attorney General in the DOJ’s Civil Rights Division. “Our new initiative should send a strong message to banks and lenders that we will hold them accountable as we work to combat discriminatory race and national origin-based lending practices.”

Garland stated that the gap in homeownership rates of white and black families is wider today than before the passage of the Fair Housing Act of 1968. Statistics cited by the Consumer Financial Protection Bureau during the press conference indicate a homeownership rate of 74% in white communities versus 44% in black communities.

Clarke described DOJ’s approach to determining if redlining has occurred. First comes a comparison of a lender’s record of applications and loans in minority areas to “peer lenders” — those with similar business profiles and loan volumes. “We also consider other factors such as service areas that carve out communities of color, avoidance of minority neighborhoods when deciding where to place branches, and marketing efforts that largely avoid communities of color.”

Recognizing Market Realities:

In announcing the stepped-up enforcement effort the Justice Department acknowledged that its focus will include more than bank and credit union lenders. Fintechs will also be in the crosshairs.

“Non-depository lenders are not traditional banks and do not provide typical banking services, but engage in mortgage lending and now make the majority of mortgages in this country,” a DOJ statement said.

A ranking by Bankrate indicates that Quicken Loans was the largest mortgage lender by both dollar volume and number of loans in 2020. The site’s ranking also indicates that only four of the top mortgage lenders by either dollars or loans are banks. (These are Wells Fargo, JPMorgan Chase, Bank of America and U.S. Bank.)

At the same time that the Justice Department announced the new push, on Oct. 22, 2021, it announced a multi-million settlement with $17 billion-assets Trustmark National Bank, headquartered in Jackson, Miss. The settlement was announced in conjunction with Rohit Chopra, the new Director of the Consumer Financial Protection Bureau, and Michael Hsu, Acting Comptroller of the Currency.

“If we allow racist and discriminatory policies to persist, we will not live up to our country’s ideals,” stated Chopra. “We need a fair housing market that is free from old forms of redlining, as well as new digital and algorithmic redlining.”

This announcement is only the first of more fair-lending initiatives. Chopra has indicated that his concerns are broader than home lending.

Dig Deeper: CFPB’s New Director is No Fan of Banks

7 Areas Financial Institutions Must Be Reviewing Right Now

In ushering in a renewed focus on fair-lending enforcement, the DOJ announcement suggests that lenders and financial marketers should carefully review how they operate. In addition, institutions involved in banking-as-a-service arrangements with nonbank lenders must keep tight rein on compliance with their partners. Further, banks and credit unions outsourcing aspects of lending or servicing — indirect auto lending is one such activity — must ensure that their vendors aren’t committing discrimination.

Review Marketing Strategies: With the current state of marketing technology, financial institutions can target potential borrowers more finely than ever by geographic area, demographic description, behaviors and more. That may make media buys more efficient, but there may be unintended consequences. Marketers must make sure that in tweaking the types of exposures specified for their online ads, for example, that they are not excluding people fitting any basis protected by fair-credit laws.

Chopra expressed concern about the volume of data tech and financial companies compile about consumers, “using it to make more and more decisions about our lives, including loan underwriting and advertising.”

Acting Comptroller Hsu said that “anyone who works in the field of fair lending knows that modern day redlining is not always about drawing red lines on a map. It more often involves a bank simply creating barriers that limit lending services to certain groups or communities.” Hsu said such modern redlining “is often more subtle, harder to detect and resource-intensive to find.”

Review Use Of Automated Lending Software: Similarly, removing the human element from lending does not guarantee that discriminatory patterns won’t emerge. Experts have been warning for years that lending systems based on artificial intelligence can pick up and accentuate unintended biases and must be checked.

Avoid “Digital Redlining”:

CFPB’s Chopra worries about “robo-discrimination — his term.

Chopra spoke of “digital redlining, disguised through so-called neutral algorithms, that may reinforce the biases that have long existed.” He added that “black box underwriting algorithms are not creating a more equal playing field.”

Review The Look Of Your Promotion Materials. Marketers have already become attuned to greater sensitivity to the consumers portrayed on websites, in emails and other media. Such sensitivity must be continued, including with seemingly minor marketing communications.

A major bank caught flak for a window display announcing that the new branch would soon open. The promotional display included a drawing of customers that included a black man in a wheelchair who some said appeared to be raising his palm for a handout.

Review Branch Strategy Decisions. Despite falling branch traffic and the increasing acceptance of digital banking channels, financial institutions must scrutinize their decisions made regarding branch closures, relocations or even new openings.

Review Social Media Policies, Approval Processes and Controls. When any individual can start a social media account, banks and credit unions must take care that lenders, especially mortgage loan officers, don’t do anything that can be used against their employer in a fair-lending context. Misguided initiatives may pay off in pain.

Review Incentive Pay Programs. Some past fair-lending cases have included allegations that compensation programs for lenders resulted in discriminatory actions, including higher rates for minority borrowers.

Review Pricing of Products. This can be another minefield of risk if it can be proven that a lender has engaged in discriminatory pricing.

Fair-lending enforcement can be triggered by referrals from banking regulators and other sources. In the case of Trustmark the referral came from the Office of the Comptroller of the Currency. OCC made its referral in April 2020, during the Trump Administration.

Often intricate statistical analysis is part of the development of the Justice Department’s allegations. While “classic” fair-lending enforcement turns on disparate treatment — treating protected groups different from whites — a newer concept is “disparate impact,” where behavior that on its face is not discriminatory nevertheless results in protected groups not receiving equal treatment. The Justice Department’s announcement of its redlining program did not touch on disparate impact, but it is a known interest of Chopra. He spoke of it when he was a commissioner at the Federal Trade Commission.

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Reviewing the Trustmark Settlement

Trustmark settled with the government, specifically DOJ, OCC and CFPB. In the complaint against the bank released along with the settlement, the Justice Department stated that between 2014 and 2018, the bank “engaged in unlawful redlining in Memphis, Tenn., by avoiding predominantly black and Hispanic neighborhoods because of the race, color and national origin of the people living in, or seeking credit for properties in, those neighborhoods.” The bank was accused of violating the Equal Credit Opportunity Act, the Fair Housing Act and the Consumer Financial Protection Act. (In August 2021 the Justice Department announced a settlement with Cadence Bank, also in a redlining case.)

The complaint also states that the bank’s branches tended to concentrate in majority-white areas and that the bank’s marketing avoided minority neighborhoods. In addition, DOJ stated, Trustmark did not assign mortgage loan officers to any Memphis branch in a majority-black or majority-Hispanic neighborhoods.

Chopra said Trustmark’s actions were “a form of redlining that we have seen for decades, which is unacceptable, where a lender acts to discriminate against and discourage prospective applicants from seeking credit in certain neighborhoods on the basis of race.” The bank did not set up internal governance and oversight of fair-lending compliance until “months after” the OCC began a fair-lending exam, according to case papers.

For its part, the bank in a statement said that it entered into the settlement in order to avoid protracted litigation. As is standard in such cases, in signing the consent order it indicated neither admission no denial of the government’s claims.

What Year Is It in Washington?

Curiously, the consent papers implementing the settlement make no mention of digital marketing channels, but do address brochures in branches.

Trustmark President and CEO Duane Dewey said “we look forward to making continued progress on the lending initiatives and operational enhancements we began implementing six years ago.” He added that serving “the entirety of our communities” was a key Trustmark goal. The bank has markets in four other southern states besides Tennessee. Dewey’s statement detailed steps it had already been taking to improve service to majority-minority census tracts, including down payment assistance and loan subsidies and deployment of specialized staff in diverse markets, such as Community Lending Specialists.

The settlement terms include:

  • A civil money penalty, $4 million of which goes to OCC and $1 million of which goes to CFPB.
  • A $3.85 million loan subsidy program for purchasing properties in majority-black and majority-Hispanic neighborhoods in Memphis. The funds can be used towards closing costs, down payments and payment of mortgage insurance. No single recipient can get more than $10,000 in assistance.
  • A new lending office in a majority-black and Hispanic neighborhood in Memphis.
  • A budget of at least $200,000 for advertising, outreach, consumer financial education and credit counseling in affected markets. This includes publicity for the loan subsidy fund.

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