Redlining Legal Theories Remain Unresolved

by Poyner Spruill LLP

Poyner Spruill LLP

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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Poyner Spruill LLP | Attorney Advertising

Written by:

Poyner Spruill LLP

Poyner Spruill LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.