Since the Department of Justice (DOJ) announced its redlining enforcement effort in October of 2021, four lending institutions agreed to consent orders for alleged redlining violations (the Settling Lenders) by the end of 2022:
- Trustmark National Bank (Trustmark) alleged violation in Memphis Metropolitan Statistical Area.
- Cadence Bank, N.A. (Cadence) alleged violation in Houston Metropolitan Statistical Area.
- Trident Mortgage Company LP (Trident) alleged violation in Philadelphia Metropolitan Statistical Area.
- Lakeland Bank (Lakeland) alleged violation in Newark Metropolitan Division.
Redlining is an illegal practice that occurs when lenders deny or discourage applications or avoid providing loans or other credit services in neighborhoods based on the race, color, or national origin of the residents of those neighborhoods. According to the DOJ complaints, redlining violates the Fair Housing Act and the Equal Credit Opportunity Act.
The DOJ’s redlining enforcement efforts have been a coordinated affair. The department has relied on referrals from federal banking regulators for suspected redlining practices found during compliance examinations. Furthermore, the DOJ filed a joint complaint with the Consumer Financial Protection Bureau (CFPB) against Trident, a non-depository institution.
The settlements in the consent orders have been substantial and have included the following:
- Millions of dollars of civil penalties to the CFPB.
- Requirements to establish multimillion-dollar loan subsidiary funds targeted at minority neighborhoods.
- Requirements to direct millions of dollars for advertisements, outreach, consumer financial education, and community development partnerships in minority neighborhoods.
- Requirements to establish branch offices and assign loan officers in minority neighborhoods.
- Requirements to employ a fair lending officer and have employees undergo compliance training.
Below is a summary of the alleged violations of the Settling Lenders found in the DOJ complaints.
Underperforming peer lenders in majority-minority neighborhoods
According to data reported in accordance with the Home Mortgage Disclosure Act, the Settling Lenders underperformed compared to their peers in both loan applications generated and loans made in majority-minority neighborhoods. Lakeland’s peers generated loan applications and booked loans at over five times Lakeland’s rate in majority-minority neighborhoods. The remaining Settling Lenders’ peers generated loan applications and booked loans at two times the rate in majority-minority neighborhoods compared to the Settling Lenders.
Lack of branch offices in majority-minority neighborhoods
The Settling Lenders had few or no branch offices located in majority-minority neighborhoods in the Metropolitan Statistical Areas (MSAs) or Metropolitan Division (MD) where the alleged redlining violations occurred. Lakeland did not have a branch in a majority-minority neighborhood in the Newark MD. Trustmark had four of its 25 branches in majority-minority neighborhoods in the Memphis MSA; however, two of the branches were established or acquired at a time when the neighborhoods were majority white. Cadence had one of its 13 branches located in the Houston MSA in a majority-minority neighborhood, but the DOJ alleged that the one branch, located in a downtown business district, was intended to serve commuting workers and not the residents of the neighborhood. Trident had two of its 53 branches in majority-minority areas in the Philadelphia MSA; however, the two branches were in neighborhoods with a 52 percent and a 53 percent minority population.
Lack of loan officers serving majority-minority neighborhoods
The loan officers of the Settling Lenders were assigned to branches in majority-white neighborhoods. Trustmark and Cadence did not assign loan officers to their branches in majority-minority neighborhoods. According to the DOJ, the lack of access to loan officers in majority-minority neighborhoods caused disparity due to the need for an additional step—scheduling an appointment beforehand.
Additionally, the DOJ claimed the Settling Lenders relied on their loan officers with minimal oversight to conduct outreach to the community by developing referral sources and distributing loan marketing materials. This reliance resulted in little outreach to majority-minority neighborhoods due to the lack of loan officers assigned to these neighborhoods and a general lack of guidance and training for loan officers on complying with redlining restrictions. The complaints also allege the Settling Lenders failed to hire loan officers with ties to the minority communities, including loan officers who spoke Spanish in majority-Hispanic areas.
Lack of advertising and marketing to majority-minority neighborhoods
With limited exceptions, the complaints allege that the Settling Lenders failed to advertise and market their services to majority-minority neighborhoods. Although the marketing of services was done primarily through loan officers, the DOJ asserted most of the paper and digital campaigns that were conducted appeared in platforms not accessible to majority-minority neighborhoods, including not advertising in Spanish. In Trident’s direct mail marketing campaigns, over 92 percent of those direct mailings were sent to majority-white neighborhoods. Furthermore, Trident advertised to prospective applicants by giving real estate agents flyers to offer at their open houses. Over 90 percent of Trident’s open house flyers were provided at open houses in majority-white neighborhoods.
Redlining investigations and allegations are increasing. Banks should be mindful of this trend and be aware that changes to operations, market footprints, and business can create increased regulatory compliance risks. In addition, while many DOJ actions are the result of referrals from bank regulators, banks should be aware that inaction by a bank’s primary federal regulator does not guarantee that the federal government will not bring an action. Finally, this continues to be one of the more challenging areas given the lack of litigated cases and clear legal standards; regulators’ expectations continue to evolve based on government complaints and settlements.