Fair Lending Enforcement: Something Old, Something New (7 Action Steps)
The U.S. Department of Justice is working hard at fair lending enforcement. This is not a concern that has faded into the background. Quite the opposite is true. The DOJ is always working on fair lending cases. And many of these cases have been referred by financial institution examiners. In short, fair lending should definitely be on your front burner - along with BSA, the FACT Act, and anything you know is going wrong in your institution.
Whenever we talk about enforcement trends, we tend to focus on changes in enforcement. In short, we look first at what is new. We figure we have the old stuff under control. It is what is coming at us that worries us.
In the case of fair lending, what is new is in fact what is old. The most recent cases look strikingly like some older ones, Decatur and Chevy Chase to name a few. While the current cases have some new features, the core of these cases is a little different from those of the early 1990's. They involve location, product, and marketing practices that amount to redlining on a prohibited basis.
This says something very different from "been there, done that." It says the same problems can happen - over and over. And they do. Two of DOJ's most recent fair lending cases show this.
US v. First American Bank
This case was referred to DOJ by the Federal Reserve when examiners concluded that there was reason to believe that the bank was engaged in a pattern or practice of discrimination based on race and national origin. Examiners concluded that the bank was redlining areas with predominantly minority populations while targeting their products and services to white areas and customers.
The DOJ complaint first established that the Chicago area's residential housing data showed a significant pattern of racial and ethnic segregation. Then it overlaid the Bank's locations, assessment areas, and marketing practices to show that the bank's branches were located in non-minority areas, and that its marketing programs did not include any programs or campaigns to counteract or overcome the branch location concerns.
This geographic and marketing approach is strikingly similar to the arguments raised in the Decatur Federal case. One new aspect, however, is that DOJ looked not only at the location of branches but also at the locations for the bank's ATMs. The bank's failure to locate ATMs in minority communities was used to support the DOJ's argument that the bank did not intend to serve the minority communities in its general market area.
In addition to the location analysis, DOJ evaluated the bank's marketing techniques. Here is where some practices, although not new, are directly questioned for the first time. First, the bank was charged with soliciting credit through discriminatory means including the use of mortgage brokers who served primarily white communities in the bank's market area. While the Long Beach case found the lender responsible for the results of broker activities, the First American case reaches beyond that to hold the lender responsible for choosing mortgage brokers who do not discriminate.
DOJ clinched the geographic case by throwing in the bank's CRA assessment areas. These areas were designed to exclude almost all the predominantly minority areas in the Chicago MSA. DOJ noted that the assessment area designation actually violated the Federal Reserve Board's regulation which recommends including entire political subdivisions (the bank divided up parts of counties) and prohibits drawing lines that exclude minority neighborhoods. In the case of First American's delineations, the FRB and the DOJ concluded that the lines were drawn specifically to exclude minority populations.
Second, the bank's general marketing program was questioned in a new light. The bank used advertising vehicles, such as print and radio, that reached general audiences. The bank did not use specialized media that would reach directly to one or more minority communities.
Many bankers will argue that to use a specialty media, such as a radio station oriented to a minority community, would result in unequal treatment of minorities and non-minorities. This so-called concern doesn't hold water. The mainstream advertising vehicles, such as the local newspaper of general circulation, reaches the non-minority population. However, often extra steps are needed to reach a minority community in a convincing way.
DOJ's complaint noted a total absence of marketing through minority media. In essence, the argument that to use anything other than mass media would be somehow unequal will not prevail. Nor can a financial institution simply advertise in the general media and assume that it is doing enough.
Perhaps the most disturbing aspect of the First American case was evidence of how far we have not come. Bank officials made statements to their examiners that demonstrated that their lending policies and practices were based on racial and ethnic stereotypes. This amounted to statements that indicated that bank officials assumed that minorities only qualified for government loan programs.
The second case was brought against Old Kent Bank and its holding company, Old Kent Financial Corporation, based in Grand Rapids, Michigan. Old Kent has been acquired by Fifth Third Bank.
The case against Old Kent is based on the bank's practices in the Detroit, Michigan MSA. Like Chicago, the Detroit MSA has a large African American population within the City of Detroit (81%) while the entire MSA population is 23%. Old Kent is based in Grand Rapids and has historically centered its business in the western and central portions of the state. It has entered the Detroit market fairly recently. Like Chevy Chase a decade earlier, Old Kent was caught in a snapshot at the wrong time - after entering a market but before providing services to minority and low- or moderate-income areas.
DOJ did not limit the case to one type of credit. Instead, it charged Old Kent with discrimination in credit for small business loans and residential real estate loans and a race-based pattern of locating opening new branches. The locational problem permeated every analysis.
Of the bank's 18 branches in the Detroit MSA, not one was within the City of Detroit. Old Kent compounded the geographic discrimination by delineating its assessment area to exclude most of the African American neighborhoods in the City of Detroit.
Marketing practices played an important role in the case. DOJ noted that the bank had solicited and funded very few small business or residential real estate loans in minority census tracts outside of its assessment area. Finally, DOJ argued that the bank limited the contact of its marketing and business solicitation personnel with borrowers located in the City of Detroit. DOJ also alleged that Old Kent had told African American business owners in the City of Detroit that it would not make loans to them.
- Review your branch and ATM locations and compare them to demographics. Make sure that you are providing access and service to minority communities.
- Now study your HMDA data to see whether any problem patterns emerge.
- Look outside your assessment area. It is not enough to look at the assessment area to see what is included. You must also look outside the lines to see what has been excluded.
- Review your advertisements for content. Look for anything - language, design, placement - that could indicate exclusion to a minority.
- Compile a list of media with which your marketer has placed ads. Make sure that the ad strategy includes a plan to reach the minority communities in a credible way.
- Train management. If nothing else, they must know what to say and what not to say!
- Brief management and the board on these cases. Five minutes should be enough time to make it clear that the bank must live up to its official policies.
Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 14, 12/04
First published on 12/01/2004