The Consumer Financial Protection Bureau (CFPB) and U.S. Department of Justice (DOJ) recently announced a proposed consent order with BancorpSouth Bank to settle charges that the bank’s mortgage lending practices violated the Fair Housing Act and the Equal Credit Opportunity Act. According to the CFPB’s press release, the case represents the CFPB’s first use of testers or “mystery shoppers” posing as consumers to support discrimination charges. While focused on mortgage lending, the settlement has significant fair lending implications for many types of non-mortgage credit.

In their joint complaint filed in federal court in Mississippi, the CFPB and DOJ alleged that the bank’s conduct constituted a “pattern or practice of discrimination [that] was intentional and willful and implemented with reckless disregard for the rights of” African American applicants and borrowers. The bank’s alleged discriminatory conduct included the following:

• The bank is alleged to have engaged in the redlining of majority-minority neighborhoods (census tracts with more than a 50 percent minority population) in the Memphis, Tennessee, Metropolitan Statistical Area (MSA), the MSA where the bank generated the most mortgage loan applications. The bank allegedly excluded most majority-minority neighborhoods in delineating its Community Reinvestment Act assessment area and discouraged mortgage lending outside of that area. It also allegedly concentrated its branch locations outside of majority-minority neighborhoods and did not “advertise meaningfully” in such neighborhoods. According to the complaint, the bank drew a smaller proportion of mortgage loan applications from majority-minority neighborhoods than its peer lenders operating in the Memphis MSA, the lending disparities between the bank and its peers were “statistically significant,” and they “cannot be explained by a legitimate, non-discriminatory reason.”
• The bank allegedly rejected African American applicants for consumer- and business-purpose mortgage loans at significantly higher rates than similarly situated white applicants and charged African American borrowers higher annual percentage rates on such loans than it charged similarly situated white borrowers. According to the complaint, while nearly all credit decisions on mortgage loans originated by the bank for sale on the secondary market were made using an automated underwriting system, and rates on such loans were set based on rate sheets, loan officers had “wide discretion” to approve or deny mortgage loans to be held by the bank in its portfolio and “nearly unfettered discretion” to price such loans, including the interest rate and origination fee.

The complaint alleges that the bank provided only minimal guidance to loan officers on how borrower or loan characteristics should affect underwriting decisions, did not require loan officers to document factors they considered in pricing loans, and had no process to ensure consistent pricing. The agencies allege that the higher denial rates and pricing for African American applicants and borrowers resulted from the bank granting discretion to employees, coupled with inadequate controls and monitoring. The CFPB and DOJ allege that such disparities “cannot be explained by a legitimate, non-discriminatory reason,” “were not justified by a legitimate business need,” and “there were also less discriminatory alternatives available.”

• The complaint alleges that the bank instructed its loan officers to deny applications from minority applicants more quickly than those from other applicants and not to provide credit assistance to “borderline” applicants. According to the complaint, while the bank generally permitted loan officers to assist marginal applicants, it explicitly departed from that approach for minority applicants. In making such allegations, the agencies relied on an audio recording of an internal bank meeting.

The complaint also includes allegations based on a series of “matched-pair tests” at several bank branches in which the CFPB sent an African American tester and a white tester posing as first-time home buyers to the same branch within 10 days of each other. According to the complaint, each African American tester was assigned a slightly better financial profile than the corresponding white tester, such as a higher credit score and monthly income. The complaint alleges that the African American testers were treated less favorably than the white testers, such as higher closing cost estimates and less assistance with real estate agent recommendations, and further alleges that these differences “were on the basis of the race and color and not risk-related characteristics of the testers.”

The consent order requires the bank to pay $2,776,890 into a settlement fund for “alleged victims of underwriting and/or pricing discrimination,” with the agencies determining who is entitled to monetary relief, and a $3,030,756 civil money penalty to the CFPB. The bank must also make credit offers to denied African American applicants, but is not required to “make any unsafe or unsound loan or to make a loan to a person who is not qualified based upon lawful, nondiscriminatory terms; however, [the bank] may choose to apply more flexible underwriting standards in connection with these credit offers, so long as those standards comport with safe and sound lending practices.”

In addition to hiring consultants to assist with revisions to the bank’s fair lending compliance management system and development of a redlining remedial plan, other consent order requirements include:

1. implementing, maintaining, and monitoring underwriting and pricing policies designed to avoid unlawful discrimination;
2. investing $4 million in a loan subsidy program—with subsidies through various means such as reduced interest rates or grants for closing cost or down payment assistance—to make mortgage loans to qualified applicants in majority-minority neighborhoods in the Memphis MSA “on a more affordable basis than [the bank] otherwise makes available;”
3. spending at least $100,000 annually for at least three years on targeted advertising and outreach to generate applications for mortgage loans from qualified residents in majority-minority neighborhoods in the Memphis MSA;
4. opening a new branch or loan production office in a high-minority neighborhood in the Memphis MSA; and
5. spending at least $500,000 on partnerships with community-based or governmental organizations that provide services such as financial education, homeownership counseling, foreclosure prevention services, and credit repair to residents of majority-minority neighborhoods in the Memphis MSA.

The remedial actions required by the consent order track those required by the CFPB and DOJ in the consent order they entered into with Hudson City Savings Bank last year to settle allegations that the bank engaged in a pattern or practice of redlining predominantly minority neighborhoods in its residential mortgage lending.