Publications
Federal Redlining Enforcement Affects Mortgage Lending Institutions
By: Matthew Palmer-Ball
Mortgage lenders should be aware of a vigorous new federal partnership aimed at increasing enforcement of anti-discrimination laws in the mortgage lending industry. The partnership, announced in late 2021, promises numerous investigations across the country into “redlining”—discrimination based on borrowers’ race or national origin, which is prohibited under the Fair Housing Act (“FHA”) and the Equal Credit Opportunity Act (“ECOA”). The federal agencies leading the charge are the Department of Justice Civil Rights Division’s Housing and Civil Enforcement Section (“DOJ”), Consumer Financial Protection Bureau (“CFPB”), and Office of the Comptroller of the Currency (“OCC”). Their leaders, all recent Biden Administration appointees, have made clear the vigor with which they plan to protect against mortgage discrimination. Said Attorney General Merrick B. Garland, “When people are denied credit simply because of their race or national origin, their ability to share in our nation’s prosperity is all but eliminated. Today, we are committing ourselves to addressing modern-day redlining by making far more robust use of our fair lending authorities. We will spare no resource to ensure that federal fair lending laws are vigorously enforced and that financial institutions provide equal opportunity for every American to obtain credit.”
Two such investigations are already public, bringing large civil penalties and burdensome consent orders for two national banks: Cadence Bank for its operations in Houston, Texas; and Trustmark National Bank for its operations in Memphis, Tennessee. Both have entered into consent orders to settle claims that they knowingly engaged in practices that made it harder for minority applicants to obtain mortgages. The consent orders encumber the banks with remedial programs, such as:
- Conducting a “fair lending program” assessment and submitting a report and compliance plan to the government, subject to the government’s satisfaction.
- Training for all lending employees and any supervisors on the FHA and ECOA.
- Hiring a third-party consultant to conduct a Community Credit Needs Assessment for minority census tracts in the banks’ lending areas, subject to the government’s satisfaction.
- Partnering with community or government organizations that provide services and education to minority communities on the subject of lending and finances.
- Hiring a Community Lending Manager and Community Development Manager to increase minority loan applications and marketing.
- Expansion of physical locations into minority census tracts with staffing from loan officers.
- Increasing advertising in minority census tracts.
- Investing millions of dollars into subsidies for minority loan applicants.
On top of the costs of those programs, both banks will pay civil fines—a total of $3M for Cadence and $5M for Trustmark. The partnership announcement and consent orders breathe new life into old techniques long used to investigate redlining but also highlight new developments.
What’s old is new again. As with previous redlining investigations, the government is still focusing on physical branch locations (do banks concentrate their branches and loan officers in majority white neighborhoods?), marketing (do banks advertise in ways that are focused on majority white audiences?), and data (how do a bank’s minority loan applications and originations compare to those of local peers?).
However, three new developments set this initiative apart from history. The first is coordination. DOJ, CFPB, and OCC are sharing data and resources in a novel way. Coupled with the involvement of U.S. Attorney Offices and state attorneys general across the country, the partnership has an unprecedented network to ratchet up enforcement statistics.
Second, they promise to investigate not just depository banks but also non-depository institutions, the latter of which now account for the lion’s share of new mortgages in the United States.
Finally, they vow to scrutinize the use of “race-blind” algorithms used by lenders to qualify mortgage applicants, especially algorithms with the learning capabilities of artificial intelligence. Although algorithms were adopted in part to remove potential bias from lending decisions, CFPB Director Rohit Chopra has forcefully warned, “[A]t the CFPB, we will also be closely watching for digital redlining, disguised through so-called neutral algorithms, that may reinforce the biases that have long existed.” Chopra asserted that recent data suggested that minority borrowers were still being discriminated against even as more and more lenders turned their decisions over to algorithms, which could rely on “alternative” data, such as utility payments, rent payments, and how those payments were made. “We should never assume that algorithms will be free of bias,” Chopra added. “If we want to move toward a society where each of us has equal opportunities, we need to investigate whether discriminatory black box models are undermining that goal.”
Taking the feds at face value, it is clear that lenders face a new risk of investigation if they do not make sufficient efforts to reach minority borrowers. Even the use of race-neutral algorithms may expose lenders to possible discrimination if banks do not also ensure that the outcomes from the algorithms are in fact non-discriminatory. To current regulatory leaders, discrimination is no longer confined to the subtext of an applicant’s skin color, last name, or zip code. It may extend to social or cultural factors that are not as traditionally identified by race, such as rental histories and the specific method of payment used to pay a utility bill. Furthermore, regardless of whether a lender uses algorithms, putting boots on the ground by deputizing U.S. Attorney Offices and state attorneys general will give the partnership hyper-local insights into banks that the D.C.-based agencies might otherwise overlook.
Matthew Palmer-Ball
Matt Palmer-Ball is a seasoned trial attorney and former federal prosecutor. He concentrates his practice in the areas of complex commercial litigation, white collar crime, and internal and government investigations. Prior to joining Wyatt, Matt served as a Trial Attorney with the U.S. Department of Justice’s Public Integrity Section and as an Assistant U.S. Attorney for the District of Columbia. Read more.
