Consumer Finance Insights
July 7, 2016

CFPB and DOJ Propose $10.6 Million Settlement in Discriminatory Lending Action

On June 29, the Consumer Financial Protection Bureau (CPPB) and Department of Justice (DOJ) announced a joint enforcement action against a regional bank for alleged discriminatory mortgage lending in violation of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA), filed in the District Court for the Northern District of Mississippi.  The ECOA and FHA both prohibit creditors from discriminating on the basis of race in mortgage lending practices.

The agencies’ complaint alleges that, between 2011 and 2013, the bank “discriminated in a number of ways through virtually every stage of its lending process.”  Specifically, the complaint alleges that the bank engaged in redlining in the Memphis area (the area in which it generates the most mortgage applications) by discouraging people in minority neighborhoods from applying for credit.  The bank also allegedly discriminated against African American borrowers by rejecting their applications at a higher rate and charging an average of 30-64 basis points more for mortgage loans than similarly situated white applicants.  The complaint further alleged that the bank instructed its loan officers to deny applications from minorities and other “protected class members” more quickly than other applicants, and not to provide credit assistance to “borderline” applicants that might have improved their chances of being approved for a loan.

The agencies also sent testers or “mystery shoppers” to several bank locations to inquire about mortgages.  This represents the first time that the CFPB has used testing as part of an investigation, although the DOJ and other agencies have done so in connection with fair lending investigations in the past.  According to the complaint, those tests revealed that the bank treated African American testers less favorably than similarly situated white testers.

The parties also filed a proposed consent order.  If approved, the bank must create a $2.78 million settlement fund to redress affected consumers harmed by the bank’s alleged discrimination and pay a civil penalty of approximately $3 million to the CFPB.  The bank will also invest $4 million in a program to extend mortgage loans to qualified applicants in minority neighborhoods in Memphis on a more affordable basis than would otherwise be available, “to remedy its alleged redlining.”  Additionally, the bank must spend at least $100,000 per year that the order is in effect (a minimum of 3 years) on targeted advertising and outreach and spend $500,000 on community outreach programs.  In addition to the order’s monetary terms, the bank must, among other things, expand its physical presence in minority neighborhoods and offer African American borrowers who were denied mortgage loans during the relevant time period a new opportunity to apply for a loan at a subsidized rate.

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