DOJ and OCC Announce Major Settlement of Fair Loan Allegations | Manatt, Phelps & Phillips, srl
As part of the largest fair loan law enforcement move in several years, the Department of Justice (DOJ) and the Office of the Comptroller of the Currency (OCC) announced on August 30 concurrent settlements with a national banking association (the Bank) regarding alleged violations of the Fair Housing Act (FHA) and, in the DOJ complaint, the Equal Credit Opportunity Act (ECOA). These include, in particular, separate but coordinated establishments. The DOJ and OCC alleged that the bank had engaged in lending discrimination by marking predominantly black and Hispanic neighborhoods in the greater Houston area. The breadth of the settlements – a $ 3 million penalty and the requirement to invest at least an additional $ 5.5 million in various initiatives – and the scope of the allegations in DOJ’s complaint and consent order of the OCC make one thing clear: Fair loans and other âracial equityâ issues will be enforcement priorities for the Biden administration.
In October 2017, the OCC began a fair review of the Bank’s lending, including statistical analyzes and comparisons with peer lenders. (The Bank says it self-identified the issues addressed by the regulations.) The OCC concluded that the Bank likely engaged in FHA violations by structuring its mortgage operations to avoid providing access to credit. first mortgage loans to majority minority residents. Houston metropolitan area census tracts. On January 30, 2019, the OCC referred the case to the Department of Justice.
Although the Bank operates approximately 100 branches in six states, there is no allegation in the DOJ’s complaint regarding a market other than the Bank’s Community Reinvestment Act âassessment areaâ in and around Houston. The allegations are quite typical for redlining cases:
- Concentration of branches in predominantly white neighborhoods
- Loan officers focusing on predominantly white neighborhoods
- Awareness and marketing targeted to predominantly white neighborhoods
- Disproportionately low numbers (compared to suspected peer lenders) of mortgage applications and mortgage origination in predominantly black and predominantly Hispanic neighborhoods
In addition, the DOJ complaint (filed concurrently with the settlement announcement) also refers to other alleged shortcomings that may indicate the direction in which the fair application of the loans is heading. These include alleged failures to “hire loan officers with ties or connections to predominantly black and Hispanic areas” and “to train their loan officers or other staff to take measures to meet the credit needs of predominantly black and Hispanic areas â. Additionally, the DOJ complaint refers to a lack of advertising in Spanish, despite the fact that more than 700,000 people in the Houston area speak Spanish with limited fluency in English.
The OCC consent order contains a civil fine of $ 3 million payable to the US Treasury. Under Department of Justice regulations (subject to court approval), the bank is to invest $ 4.17 million in a loan grant fund for residents of predominantly black and Hispanic neighborhoods in the region. Houston, $ 750,000 to develop community partnerships to improve access to residential mortgage credit in these neighborhoods, and at least $ 625,000 for advertising, awareness, consumer financial education and repair initiatives credit.
Why is this important
This is the first of what we expect to be in many equitable loan enforcement actions under the Biden administration and the largest equitable loan enforcement action in several years. The regulations also confirm that deficiencies in just one of the many markets served by a lender can have significant consequences. As noted, the settlement documents make no reference to the Bank’s activities in the other five states it serves, although the OCC presumably took these other areas into account in its fair review of the loans.
If lenders were always waiting for a reason to be proactive in identifying and correcting potential fair loan problems, this is it. Qualitative reviews of fair loan policies, procedures and marketing should be performed to identify the issues that create fair loan risk. Quantitative statistical analyzes of loan data, including comparisons with peer lenders, should also be performed. The DOJ complaint also alleges that it identified disparities in applications and arrangements between the Bank and its so-called peer lenders over a period of five years. Data on peer-to-peer lending is publicly available, so lenders don’t have to wait for a potentially aggressive regulator to handle the numbers. Risks can be identified and practices adjusted before regulators arrive.
This case also highlights the importance of due diligence prior to acquisition. The alleged white-neighborhood bank’s footprint in Houston is apparently due to a merger with another bank rather than deliberate choices to open branches. Despite at least some efforts by the Bank to expand its footprint in minority neighborhoods due to the known imbalance caused by the merger, these coercive measures eventually followed. Entities should therefore conduct fair loan valuations, including census tract footprint analyzes, a critical component of pre-acquisition due diligence efforts; good faith loyal lending efforts in stride may not be enough to avoid scrutiny.