Compliance Blog

Written by Eliott C. Ponte, Regulatory Compliance Counsel

Yes, I said another redlining case.  Regular readers of the NAFCU blog will remember that Brandy Bruyere first wrote about redlining almost one year ago today.  As Brandy's blog explained, New York's Attorney General filed an action against Evans Bancorp for unlawful discrimination on the basis of race in violation of the Fair Housing Act.  Specifically, New York's Attorney General alleged Evans Bank limited its branching and lending activities of credit products to a particular geographic area in the highly-segregated Buffalo, New York metropolitan area.  Recently, it was announced that Evans Bancorp agreed to pay nearly $1 million to end the lawsuit.

On Thursday, the CFPB and the Department of Justice (DOJ) announced a proposed consent order with Hudson City Savings Bank to settle similar allegations of violating the Fair Housing Act and Equal Credit Opportunity Act.  In a joint complaint filed in New Jersey District Court, the CFBP and DOJ alleged that Hudson City Savings Bank intentionally engaged in a pattern or practice of unlawful redlining by structuring its business so as to avoid the credit needs of majority-Black-and-Hispanic neighborhoods in its residential mortgage lending, and thereby engaging in acts or practices directed at prospective applicants that discouraged applicants in these neighborhoods from applying for credit.  Phew, that was a long sentence. Essentially, the complaint states that Hudson City Savings Bank discouraged minorities from applying for loans by (1) placing its branches outside of densely populated Black-and-Hispanic areas, and (2) not accepting first-lien mortgage loans at branches proximate to a majority of the Black-and-Hispanic areas.

Specifically, the complaint alleges that from 2004 to 2010, Hudson City Savings Bank sought to expand its presence through branch expansion and acquisition.  Bank management provided direction to explore markets in Staten Island, Long Island, Connecticut, and parts of New York.  As alleged in the complaint, these areas exclude and form a semi-circle around the four counties in New York State with the highest proportions of majority-Black-and-Hispanic neighborhoods: Queens, Kings [A.K.A. Brooklyn], Bronx, and New York Counties.  Moreover, during the relevant time period, Hudson City Savings Bank only accepted first-lien mortgage loans at select branches, which were only located in census tracts with relatively low Black and Hispanic populations.  Thus, the complaint alleges, Hudson City Savings Bank concentrated its lending network to avoid lending in Black-and-Hispanic areas.  To boot, the complaint alleges Hudson City Savings Bank failed to exercise adequate oversight or hire sufficient staff to ensure fair lending compliance and had no written policies or procedures to monitor for compliance.

So what is Hudson City Savings Bank's penance?  If the proposed consent order is approved by the court, Hudson City Savings Bank will pay more than $30 million in fines and restitution, which include opening or acquiring at least two new full-service first-lien mortgage accepting branches proximate to a majority of the Black-and-Hispanic areas. In addition, Hudson City Savings Bank will need to hire a consultant to assess the credit needs of the Black-and-Hispanic communities within the affected metropolitan statistical areas, and administer Fair Lending Training to ensure that their activities are conducted in a nondiscriminatory manner.  Moreover, the order stipulates that this training will be conducted annually.

Both complaints indicate that regulators are looking for financial institutions that may be discriminating against certain classes of borrowers.  While credit unions are generally not the type of financial institution that engages in discriminatory practices, under the disparate impact theory, a credit union may have a policy or practice that disproportionately has a negative effect on a prohibited basis even though the credit union has no intent to discriminate.  Thus, credit unions may want to periodically review its policies and practices to ensure its lending program does not have an unintentional discriminatory impact on its members.  To help credit unions comply with fair lending, below is a summary of several key resources to review before assessing a lending program:

• NCUA Fair Lending Guide:  NCUA's Office of Consumer Protection issued a Fair Lending Guide in March of 2013.  The guide gives a great overview of fair lending.
• NCUA Fair Lending FAQs
• NCUA Fair Lending Compliance Best Practices
• ARIES Exam Questions:  NCUA Examiners use the ARIES Questionnaire to examine credit unions.  The AIRES Questionnaire has a section on Fair Lending, which may be helpful to credit unions.
• NCUA Examination Guide:  Appendix 19B contains an overview of Equal Credit Opportunity Act objectives.
• NCUA Fair Lending Website:  The NCUA complied several resources to help credit unions comply with the various laws and regulations that apply to fair lending.
• DOJ Fair Lending Website:  The DOJ's Fair Lending Website contains several resources related to fair lending, including its annual report to congress that contains detailed information on recent fair lending litigation.
• FFIEC Fair Lending Examination Procedures:  FFIEC issued interagency Fair Lending Examination Procedures, which will give you additional insight into the objectives of a fair lending examination. 
• Federal Reserve Consumer Outlook:  The Philadelphia Federal Reserve complied an impressive amount of fair lending resources for depository institutions of all types.  This resource is an excellent resource page.
• Fair Lending Webinar:  Another good fair lending resource is the Federal Reserve Bank of San Francisco interagency Outlook Live webinar on Fair Lending, which is scheduled to take place on place on Thursday, October 15, 2015 (register here).  The webinar will be 90 minutes long and cover CFPB mortgage updates, use of data in evaluating fair lending risk, compliance management, pricing, maternity leave discrimination, post-origination risks, auto lending settlements and others. Participating agencies include the DOJ, CFPB, FDIC, OCC, FRB, HUD and NCUA.