On October 1, 2015, McGuireWoods reported on the mortgage redlining settlement entered into by Hudson City Savings Bank, F.S.B. (Hudson City), the Consumer Financial Protection Bureau (CFPB), and the Department of Justice (DOJ). Aside from the significant costs imposed on Hudson City under the consent order, the action also illustrates the CFPB’s revised approach to redlining analysis, focusing on applications rather than originations and comparing Hudson City’s credit application statistics to those of its peers. The complaint  identified the following statistically significant disparities:

  • Hudson City generated only 4.8 percent of its applications in the New York/New Jersey Metropolitan Statistical Area (MSA) from properties in majority African-American or Hispanic census tracts, while peer banks generated 13.2 percent of their applications from such majority tracts.
  • Hudson City generated only 1.5 percent of its applications from “high” African-American and Hispanic census tracts in the New York/New Jersey MSA, while its peers generated 6.6 percent of their applications from such tracts.
  • Only 0.8 percent of applications in the Camden, New Jersey, MSA were associated with properties in majority African-American or Hispanic census tracts, while peer banks generated 8.3 percent of their applications from such majority tracts.
  • Hudson City generated only 0.1 percent of its applications from “high” African-American and Hispanic census tracts in the Camden MSA, while its peers generated 4.4 percent of their applications from such tracts.
  • Only 1.6 percent of applications in the Bridgeport, Connecticut, MSA were associated with properties in majority African-American or Hispanic census tracts, while peer banks generated 7.6 percent of their applications from such majority tracts.
  • Hudson City generated only 0.2 percent of its applications from “high” African-American and Hispanic census tracts in the Bridgeport MSA, while its peers generated 2.0 percent of their applications from such tracts.

The complaint also noted statistical disparities associated with Hudson City’s brokers. Per 2010 census data, only 7.4 percent of brokers utilized by Hudson City in the New York/New Jersey MSA were headquartered in majority African-American or Hispanic census tracts, and none of the brokers utilized by Hudson City in the Camden MSA were headquartered in such tracts. Between 2011 and 2013, only 0.67 percent of applications generated by Hudson City’s brokers came from African-American or Hispanic applicants.

Similar redlining concerns arose in connection with Hudson City’s retail branches. The complaint alleged that, between 2004 and 2010, Hudson City opened or acquired 54 branches, yet of those branches, only four were located in majority African-American or Hispanic census tracts.

In addition, the CFPB and DOJ alleged that Hudson City’s Community Reinvestment Act assessment areas excluded a significant percentage of majority African-American and Hispanic neighborhoods in the New York/New Jersey MSA, and all of such neighborhoods in the Camden MSA. As a result, residents of these areas would not be considered for benefits the bank generally offered to low-income borrowers, such as discounted home improvement loans. Moreover, the complaint identified problems with Hudson City’s fair lending compliance management system. Hudson City had no written policies to ensure compliance with fair lending obligations, and it failed to conduct internal redlining analyses after being instructed to do so by the CFPB in 2012.

In light of the CFPB and DOJ action and the costs imposed on Hudson City through the consent order, financial institutions should be cognizant of the following:

  • The CFPB now assesses redlining practices by comparing peer banks, meaning that good intentions to comply with fair lending laws may be insufficient if other banks generate applications and originate loans in high-minority areas at an increased rate.
  • Because the CFPB now bases its redlining analysis on peer comparison, it is important for financial institutions to carefully determine the other institutions in their peer group by focusing on those with similar characteristics.
  • Fair lending compliance still plays a large role in the CFPB’s assessment of redlining practices, meaning that financial institutions should implement a robust fair lending compliance management system complete with policies and procedures and internal redlining analyses.
  • Branch locations remain an important consideration in an era of increased online banking, as do the locations of an institution’s brokers and correspondents.
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