The Department of Justice (DOJ) joined other federal agencies in announcing an increased focus on fair lending issues. On October 22, 2021, DOJ announced a new initiative to crack down on “modern-day” redlining. 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 among the three agencies, federal prosecutors, and state attorneys general. To kick off the new initiative, DOJ, the CFPB, the OCC, and the U.S. Attorney’s Office for the Western District of Tennessee announced a consent order against Trustmark National Bank for alleged illegal redlining.
In announcing DOJ’s Combatting Redlining Initiative (“Initiative”), Attorney General Merrick Garland explained that the agencies are “committing [them]selves to addressing modern-day redlining by making far more robust use of our fair lending authorities.” He added that DOJ “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.”
Under the Initiative, the agencies will:
- Use U.S. Attorneys’ Offices to ensure that fair lending enforcement takes advantage of local expertise on housing markets and credit needs;
- Extend DOJ’s analyses of potential redlining to non-depository institutions that DOJ indicated are originating the majority of mortgage loans;
- Strengthen DOJ’s partnership with financial regulatory agencies to ensure identification and referral of fair lending violations to DOJ; and
- Increase coordination with state attorneys general on fair lending matters.
Acting Comptroller of the Currency Michael Hsu and CFPB Director Rohit Chopra seconded these elements of the Initiative. Acting Comptroller Hsu referred to an “all hands on deck” approach given difficulties in detection of redlining and associated investigation costs. Director Chopra’s comments focused on the use of AI in lending decisions. He advised regulated lenders that the CFPB will be “watching for digital redlining,” citing what he called “algorithmic bias” and the need for investigation of whether “discriminatory black box models are undermining th[e] goal” of equal opportunity.
Trustmark Redlining Settlement
DOJ, the U.S. Attorney’s Office for the Western District of Tennessee, the CFPB, and the OCC announced the first settlement under the Initiative, an agreement with Trustmark National Bank (“Trustmark”) to resolve allegations that the bank engaged in discriminatory lending by redlining minority neighborhoods in Memphis, Tennessee. The OCC referred the matter to DOJ and the CFPB (the “Agencies”) based on its findings in a fair lending examination. In the complaint, the Agencies alleged that Trustmark did not market, offer, or originate 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 in majority Black and Hispanic census tracts even though half of the census tracts in Memphis are majority-minority.
The complaint also focused on allegedly inadequate fair lending monitoring, including allegedly deficient policies and procedures, lack of internal governance and oversight of fair lending matters, lack of fair lending risk assessments until 2018, and failure to take fair lending into account in branching decisions or new loan products until 2018.
Home Mortgage Disclosure Act data played a prominent role in the allegations, with the Agencies asserting that the percentage of residential mortgage loan applications that Trustmark received from borrowers in majority Black and Hispanic census tracts and the percentage of mortgage loans made to borrowers in those tracts was far below the percentages of Trustmark’s peer lenders in the Memphis area. The Agencies alleged Trustmark had no legitimate, non-discriminatory reason for this statistically significant disparity.
Based on these allegations, the Agencies asserted claims for violation of the Fair Housing Act, the Equal Credit Opportunity Act (ECOA), and a derivative claim for violation of the Consumer Financial Protection Act based on the ECOA violation. Under the proposed consent order, Trustmark will pay a $5 million civil money penalty to the CFPB, with a credit for the $4 million civil money penalty paid to the U.S. Treasury under a separate agreement with the OCC. In addition, Trustmark must invest $3.85 million in a loan subsidy program to increase mortgage credit access in Memphis neighborhoods impacted by the allegedly illegal redlining.
More than half of the consent order is devoted to significant and wide-ranging policies, procedures, and programs that Trustmark will have to implement and follow pursuant to the consent order. These include:
- Fair lending compliance;
- Fair lending training;
- Preparing a community credit needs assessment, which is a research-based market study to help Trustmark identify the needs for financial services in the Memphis lending area;
- Designating a full-time community development manager;
- Physical expansion to serve majority Black and Hispanic census tracts;
- Implementing a community development partnership program;
- Developing and implementing 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 advertisements designed to generate mortgage loan applications from qualified applicants in majority Black and Hispanic census tracts in the Memphis lending area;
- Providing four outreach programs per year for entities engaged in residential mortgage lending in majority Black and Hispanic census tracts; and
- Developing and implementing a consumer education program.
The Initiative is the latest in a series of events indicating that federal banking agencies and law enforcement have fair lending enforcement at the top of their priority lists. The Trustmark settlement is the second redlining settlement in the past few months. Mortgage loan originators and other lenders should expect more to come.
As is always the case, regulated entities can and should read the tea leaves in terms of regulatory focus reflected in the statements by regulators, the complaint, and the consent order. The complaint, for example, focuses in part on location of physical branches and the number of mortgage loan officers in those branches. This is a common element in traditional redlining analysis, and it appears that past is prologue in terms of federal banking agencies continuing to look to physical location despite the rise in online mortgage lenders. The same is true for the analysis of applications and originations as compared to those of peer firms.
Regulated entities should also consider CFPB Director Chopra’s comments on the use of AI in lending, including the supposed “black box” aspect of AI that impacts a lender’s ability to determine the basis for a particular lending decision and, therefore, the principal reasons for the decision. These are only the latest comments by Director Chopra indicating his focus on the possible discriminatory impact of using algorithms in underwriting.
Finally, the consent order presents a lengthy, detailed explanation of how the Agencies expect mortgage loan originators to meet their fair lending obligations. Regulated entities can compare the elements of their fair lending programs with the elements identified in the consent order as a way to identify possible gaps.