Martha Svoboda recently authored a separate but related article, which was published by the UNC School of Law North Carolina Banking Institute Journal. It was titled The Evolution of Redlining Post Financial Crisis and Best Practices for Financial Institutions. This article can be viewed here.

On May 8, 2018, the United States Department of Justice (DOJ) settled its fair lending “redlining” lawsuit against Minnesota-based KleinBank, a family-owned bank with assets of more than $1.9 billion. The settlement follows the recommendation by a magistrate judge on January 30, 2018, to deny KleinBank’s Motion to Dismiss¹.

“Redlining” refers to a form of illegal disparate treatment in violation of the Fair Housing Act and the Equal Credit Opportunity Act in which a lender limits access to credit to individuals resident or intending to reside in a given geographic area based on the predominant racial or national origin characteristics of that area. The suit—the only recent instance in which a lending institution opted to litigate, rather than settle, a redlining dispute—was based principally on a new theory of redlining that relied heavily on statistical comparisons of the subject lending institution’s Home Mortgage Disclosure Act (HMDA) application- or origination-related data to that of a group of “peer” lenders. However, the allegations in the complaint also included more standard fare: the DOJ alleged that the “horseshoe-shaped” delineation of the bank’s main Community Reinvestment Act (CRA) assessment area was drawn so as to intentionally exclude from assessment urban areas having majority-minority populations, and observed that the bank had no branch locations in majority-minority neighborhoods.

Another relatively new, yet increasingly popular, item on the disparate treatment menu (as seen in recent complaints accompanying settled consent orders) was also served up by the DOJ. Here, the complaint alleged that the bank’s marketing and advertising efforts were insufficiently focused on neighborhoods outside a “limited radius” of its branch locations, resulting—again—in disparate treatment of minorities. Such a claim of disparate treatment marketing is ripe for pushback from lenders. Despite an express prohibition in the Equal Credit Opportunity Act against discouraging protected-class applicants and potential applicants from seeking access to credit, there are no statutes, regulations, or case law that obligate a lender to affirmatively solicit mortgage applications from or originate mortgages in any particular population segment or geographic area.

The bank’s decision to litigate offered opportunity for development of the applicable legal standards. The DOJ’s reliance on redlining theories based on statistically significant disparities as compared to a peer lending group and the insufficiency of marketing efforts targeting protected class members have not yet been tested in a court of law. But some limited insight may yet be possible—at least from the perspective of this particular magistrate. In any suit, a defendant’s motion to dismiss should fail if the alleged facts in the plaintiff’s complaint, accepted as true, are sufficient to state a facially plausible claim for relief. Here, the magistrate’s recommendation to deny the motion may indicate that, in his opinion, the bank’s argument challenging the factual sufficiency of mere statistically significant differences between the lending patterns of the bank and its peers was not persuasive. Unfortunately, because the order and any accompanying explanatory text is presently being held under seal, such a conclusion is mere speculation, and further development of the underlying redlining legal theories will have to wait for another day.

As to the terms of the settlement itself, importantly, no civil monetary penalties were assessed against the bank by the DOJ. However, the settlement agreement imposes a number of obligations on the bank, including expansion of the bank’s CRA assessment area to include previously excluded majority-minority census tracts; a requirement to spend $300,000 on advertising and outreach in these majority-minority areas over the three-year term of the agreement; investment of $300,000 in a loan subsidy fund to remedy harm alleged in the suit; the opening of a full-service branch in one of the aforementioned majority-minority census tracts, which branch must also employ a full-time, on-site, fully trained residential lending officer; employment of both a management- and an executive-level employee to oversee development of fair lending initiatives; establishment of special purpose credit programs intended to help majority-minority residents establish or remediate consumer credit; and the continuation of annual fair lending training for all employees, including officers, whose job responsibilities touch on fair lending and CRA matters.

The settlement agreement provides helpful instruction as to measures a lender can take to lessen the risk of landing in a similar predicament as the subject bank. Importantly, a lender should evaluate carefully the constitution of the market areas it is reasonably expected to serve, and routinely monitor its penetration into the majority-minority census tracts within those areas in comparison to a group of like-kind peers. It is also essential to have in place a robust compliance management system, which includes appropriately comprehensive annual fair lending training, to catch and timely remediate potential redlining and other fair lending violations.


¹ The particular litigation procedure in this matter provided for an initial recommendation on the motion to dismiss by a magistrate judge, whose recommendation was then to have been sent to a district judge for a final ruling.

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