Key Takeaways From the CFPB’s and DOJ’s Redlining Settlement With Hudson City Savings Bank
By: Melanie Brody, Anjali Garg
On Thursday, September 24, 2015, the CFPB and DOJ filed a complaint and proposed consent order against Hudson City Savings Bank (“Hudson City”) alleging violations of the Equal Credit Opportunity Act and Fair Housing Act. The complaint alleges that Hudson City discriminated against Black and Hispanic borrowers by redlining majority-Black-and-Hispanic neighborhoods (defined in the consent order as a census tract in which more than 50 percent of the residents are identified in the 2010 U.S. Census as either “Black or African American” or “Hispanic or Latino”) in its residential mortgage lending in New York, New Jersey, and Pennsylvania. The complaint alleges that Hudson City engaged in redlining through its (1) location of branches and loan officers, (2) exclusion of Black and Hispanic census tracts from its Community Reinvestment Act (“CRA”) assessment area, (3) use of brokers outside of majority Black and Hispanic neighborhoods, (4) marketing directed at neighborhoods with relatively few minority residents, and (5) exclusion of residents from majority-minority counties from discounted home improvement loans for borrowers with low to moderate incomes.
If the consent order is approved, Hudson City will pay $25 million in loan subsidies to consumers and a $5.5 million civil money penalty to the CFPB and must engage in a variety of remedial measures, including advertising, consumer education, expanded branch locations and CRA assessment areas, community partnerships, a credit needs assessment, training, and hiring. According to CFPB Director Richard Cordray, this is the largest federal court settlement for redlining in history as measured by loan subsidies provided to consumers. The Hudson City settlement comes at the heels of HUD’s record-breaking redlining settlement against Associated Bank in May. Hudson City must provide loan subsidies (via lower interest rates, direct grants, or mortgage insurance premium payments) of up to $18,750 to qualified applicants that apply for residential mortgages for properties located in affected majority-Black-and-Hispanic census tracts. According to the proposed consent order, Hudson City “believed it was satisfying its obligations to meet the credit needs of majority-Black-and-Hispanic neighborhoods by purchasing from other lenders FHA-guaranteed mortgages that were secured by residential properties in majority-Black-and-Hispanic neighborhoods.”
Though the list of allegations and remedies is extensive, institutions should consider the following key takeaways when evaluating their own redlining risks:
1. Monitoring: The complaint alleges that Hudson City failed to monitor for redlining, including by failing to hire enough staff to oversee Hudson City’s fair lending obligations and failing to publish written policies and procedures on fair lending. In addition, the Bank allegedly did not perform broker monitoring, despite the CFPB’s recommendation to do so in 2012. The DOJ and CFPB allege that Hudson City drew fewer applications from Black and Hispanic census tracts as compared to its peers and that this difference was statistically significant.
As part of the settlement, Hudson City must document policies and procedures on fair lending and implement a formal program for statistically monitoring for redlining risk. The monitoring must include statistical peer analysis of applications and originations from neighborhoods and census tracts with high concentrations of Black and Hispanic residents.
2. Location: The complaint alleges that Hudson City’s selected brokers were mostly located outside of majority-Black-and-Hispanic areas in locations that “effectively” do not serve those populations. In addition, Hudson City’s branch locations were located primarily outside of majority-Black-and-Hispanic areas and the Bank’s management allegedly expanded its branches in a “semi-circle around” New York counties with the highest proportions of majority-Black-and-Hispanic neighborhoods. Borrowers also could not apply for a mortgage at all branch locations and were referred to branches that were not in proximity to majority-Black-and-Hispanic areas.
The consent order requires Hudson City to open or acquire two new full-service branches in majority-Black-and-Hispanic neighborhoods, ensure that branches in majority-Black-and-Hispanic neighborhoods accept mortgage loan applications, and assign at least 8 percent (or three) of mortgage loan officers to serve branches and loan production offices in majority-Black-and-Hispanic neighborhoods. The Bank must also perform a credit needs assessment of majority-Black-and-Hispanic neighborhoods and hire a Director of Community Lending to oversee the Bank’s lending in majority-Black-and-Hispanic neighborhoods.
3. Hiring: The complaint also alleges that Hudson City failed to hire sufficient staff to ensure fair lending compliance and failed to hire retail loan officers that were Black or Hispanic or who spoke Spanish. The consent order requires the Bank to hire a dedicated Fair Lending Officer, a Director of Community Lending, and a third-party Credit Needs Assessment Consultant, and appoint a Compliance Committee. Hudson City must also provide annual fair lending training to relevant employees and specialized training to management and the Board of Directors, which includes training on implicit racial bias, what constitutes redlining, and how to detect, prevent, and remedy redlining.
The settlement signals DOJ and CFPB expectations regarding institutions’ monitoring of potential redlining risks, physical presence in minority neighborhoods, and hiring practices designed to ensure fair lending compliance. Institutions should consider evaluating their own redlining controls in light of these purported expectations.