The Department of Justice (DOJ) joined with other federal agencies in announcing an increased focus on fair lending issues. On October 22, 2021, the GM announcement a new initiative to crack down on “modern” redlining. The DOJ is partnering with the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) in this initiative, which will also involve increased coordination between the three agencies, federal prosecutors and state attorneys general. To kick off the new initiative, the DOJ, CFPB, OCC, and the United States Attorney’s Office for the Western District of Tennessee announced a consent order against Trustmark National Bank for allegations of illegal redlining.
In announcing the DOJ’s Combatting Redlining Initiative (“Initiative”), Attorney General Merrick Garland explained that the agencies “are committed [them]strives to address modern day redlining by making much more robust use of our fair lending authorities. He added that the DOJ “will spare no resources to ensure that federal fair loan laws are rigorously enforced and that financial institutions provide every American with an equal opportunity to obtain credit.”
Under the Initiative, the agencies:
- Use US attorneys’ offices to ensure fair loan application takes advantage of local expertise in housing markets and credit needs;
- Extend DOJ’s analyzes of potential redlining to non-depository institutions which DOJ believes are the source of the majority of mortgages;
- Strengthen the DOJ’s partnership with financial regulatory agencies to ensure the identification and referral of fair loan violations to the DOJ; and
- Increase coordination with state attorneys general on fair lending issues.
Acting Currency Comptroller Michael Hsu and CFPB Director Rohit Chopra supported these elements of the Initiative. Interim Controller Hsu referred to an “all stakeholders on the bridge” approach given the difficulties of detecting redlining and the associated investigation costs. Director Chopra’s comments focused on using AI in lending decisions. He informed regulated lenders that the CFPB would “monitor digital redlining”, citing what he called “algorithmic bias” and the need to investigate whether “discriminatory black box models are undermining the[e] objective ”of equal opportunities.
Trustmark Redlining Rules
The DOJ, the United States Attorney’s Office for the Western District of Tennessee, CFPB and OCC announced the first settlement under the Initiative, an agreement with Trustmark National Bank (“Trustmark”) to resolve allegations the bank engaged in discriminatory loans in minority neighborhoods in Memphis, Tennessee. The OCC referred the matter to the DOJ and CFPB (the “Agencies”) based on its findings as part of a fair review of the loans. In the complaint, the agencies alleged that Trustmark has not marketed, offered or granted home loans to consumers in minority neighborhoods in the Memphis area. They further alleged that only four of Trustmark’s 25 full-service branches were predominantly Black and Hispanic census tracts, even though half of Memphis’s census tracts are majority minority.
The complaint also related to allegedly inadequate oversight of fair loans, including allegedly deficient policies and procedures, lack of internal governance and oversight of fair loan matters, lack of fair assessments of lending risks until in 2018 and the non-consideration of fair trade loans in branch decisions or new credit products until 2018.
Home Mortgage Disclosure Act data played a prominent role in the allegations, with agencies saying the percentage of residential mortgage applications that Trustmark received from borrowers in the majority of black and Hispanic census tracts and the percentage of mortgages issued to borrowers in these sectors was well below the percentages of Trustmark’s peer lenders in the Memphis area. The agencies alleged that Trustmark had no legitimate and non-discriminatory reason for this statistically significant disparity.
Based on these allegations, the agencies brought forward allegations of violation of the Fair Housing Act, the Equal Credit Opportunity Act (ECOA) and a derivative complaint for violation of the Consumer Financial Protection Act on the basis of the violation of the ECOA. Under the proposal consent order, Trustmark will pay a $ 5 million civil fine to the CFPB, with credit for the $ 4 million civil fine paid to the U.S. Treasury as part of a agreement with the OCC. In addition, Trustmark is to invest $ 3.85 million in a loan subsidy program to increase access to mortgage credit in areas of Memphis affected by the allegedly illegal redlining.
More than half of the consent order is devoted to important and extensive policies, procedures and programs that Trustmark will have to implement and follow in accordance with the consent order. These include:
- Fair loan compliance;
- Training on fair loans;
- Prepare a Community Credit Needs Assessment, which is research-based market research to help Trustmark identify financial service needs in the Memphis lending area;
- Designate a full-time community development manager;
- Physical expansion to serve predominantly Black and Hispanic census tracts;
- Implement a community development partnership program;
- Develop and implement an advertising, outreach and education plan, including spending at least $ 200,000 per year on advertising, outreach, consumer financial education, and credit counseling in the Memphis lending area;
- Targeted ads designed to generate mortgage applications from qualified applicants in the predominantly Black and Hispanic census tracts of the Memphis Loan Zone;
- Provide four outreach programs per year for entities engaged in residential mortgage lending in predominantly Black and Hispanic census tracts; and
- Development and implementation of a consumer education program.
Take away food
The Initiative is the latest in a series of events indicating that federal banking agencies and law enforcement are placing fair application of loans at the top of their priority lists. The Trustmark settlement is the second redlining settlement in recent months. Mortgage originators and other lenders should expect more to come.
As is always the case, regulated entities can and should read tea leaves in terms of regulatory guidance reflected in regulators’ statements, complaint, and consent order. The complaint, for example, focuses in part on the location of physical branches and the number of mortgage loan officers in those branches. This is a common thread in traditional redlining analysis, and it seems the past is a prologue in terms of federal bank agencies continuing to seek a physical location despite the increase in the number of mortgage lenders in Canada. line. The same is true for the analysis of applications and arrangements compared to those of peer companies.
Regulated entities should also consider comments from CFPB Director Chopra on the use of AI in lending, including the supposed ‘black box’ aspect of AI that impacts capacity. of a lender to determine the basis for a particular loan decision and, therefore, the main reasons for the decision. These are just the latest comments from Director Chopra indicating his focus on the possible discriminatory impact of using algorithms in underwriting.
Finally, the consent order provides a long and detailed explanation of how agencies expect mortgage originators to meet their fair loan obligations. Regulated entities can compare the elements of their fair loan programs with the elements identified in the consent order to identify possible gaps.[View source.]