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Appeal of Fair Lending Violations of Law (Second Quarter 2024)

Background

A bank supervised by the Office of the Comptroller of the Currency (OCC) appealed to the Ombudsman fair lending violations cited in a recent supervisory letter. Specifically, the bank appealed the supervisory office's (SO) determination that the bank engaged in a pattern or practice of unlawful discrimination in violation of the Fair Housing Act and its implementing regulations (collectively, the FH Act)1 and the Equal Credit Opportunity Act and its implementing regulations (collectively, ECOA).2

Discussion

The appeal asserts that the applicable supervisory standards for the FH Act and ECOA, including the federal agency definitions of redlining, do not support a determination that the bank engaged in redlining practices. The appeal disagrees with the conclusion that the bank did not provide equal access to credit to applicants seeking mortgage loans secured by properties in majority non-White or Hispanic census tracts (MNWHCT) during the review period.

The appeal contends that the OCC's definition of redlining in this case does not align with its policy. The appeal asserts that redlining enforcement is designed to enforce the fair lending laws for banks that intentionally exclude urban areas with MNWHCTs from marketing or outreach efforts or lending when delineating their Community Reinvestment Act (CRA) assessment areas (AA). The appeal asserts that the OCC's redlining conclusions are based on a misunderstanding and misperception of the bank's Home Mortgage Disclosure Act (HMDA) data. The appeal contends that when a mortgage lender engages in redlining, it is evident from the lender's refusal to serve MNWHCTs within a market where the lender is operating and making loans. The appeal states that in this case, the SO concluded that the bank engaged in redlining by not making a sufficient number of loans in an area where the bank has not operated. The appeal further states that the SO's departure in application of redlining would remove the bank's due process right by redefining redlining practices without notice to the bank and the banking industry.

The appeal asserts that the facts of this case do not support a redlining finding under the redlining risk factors set out in the "Fair Lending" booklet of the Comptroller's Handbook.

  • The appeal asserts that Simpson's Paradox is applicable and contends that the SO's statistical analyses are flawed because they focus on the entire metropolitan statistical area (MSA) instead of the bank's CRA AA. The appeal states that the SO's determination that the bank's reasonably expected market area (REMA) is larger than its CRA AA is inconsistent with the facts, safety and soundness principles, and the objectives of the CRA regulations. The appeal asserts the bank had a significantly higher percentage of approved applications and lower denial rates within its CRA AA than competitors and peers during the review period.
  • The appeal asserts that the bank's CRA AA was not drawn to exclude MNWHCT areas.
  • The appeal asserts that all the bank's credit products are available throughout its entire lending market and CRA AAs. The appeal contends that the bank does not exclude any whole or partial MSAs, metropolitan divisions, political subdivisions, census tracts, or other geographic areas within the bank's lending market or CRA AAs from marketing its credit products.
  • The appeal asserts that the bank provides the same services and access to credit products at all its branch offices, and the hours of operation are consistent at all branch offices throughout the bank's lending market and CRA AAs.

Supervisory Standards

The Ombudsman conducted a comprehensive review of the appeal using the supervisory standards:

Conclusions

The Ombudsman concurred with the SO's determination to cite violations of the FH Act and ECOA.

The Ombudsman concurred with the SO that the applicable supervisory standards under the FH Act and ECOA support the determination that the bank engaged in redlining and therefore violated both acts. While discriminatory intent must be present for a redlining violation under the FH Act or ECOA to occur, intent need not be overt and can be inferred by the lack of any credible information or explanation that the disparate treatment is nondiscriminatory. The Ombudsman concluded that statistical analysis of the bank's mortgage application and origination activity compared with peer lenders, the SO's analysis and conclusions regarding the bank's delineation of its CRA AAs, marketing strategy, and branching patterns support the violation determination. Consideration of these factors is consistent with the applicable supervisory standards, OCC policy, interagency guidance, and the factors that other agencies, including the U.S. Department of Justice (DOJ), rely on when reviewing redlining matters.

The Ombudsman concurred that the SO's analysis of the facts in this matter is consistent with the factors that the OCC and other agencies, including the DOJ, have relied on, as well as OCC policy. Both the OCC and DOJ have relied upon statistical evidence of an institution's proportion of applications and originations in MNWHCTs relative to comparable peer lenders, the institution's CRA AA delineation, the institution's branch placement and branching history, and the institution's outreach and marketing efforts. The Ombudsman concluded that the SO applied these factors in determining that the bank engaged in redlining. This approach for concluding on redlining and citing a violation of the FH Act and ECOA is not new and is not a violation of the bank's due process rights given that the use of these redlining factors is well-established and consistently used by the OCC and other agencies.

The Ombudsman concurred with the SO that a redlining finding is appropriate under the standards in the OCC's "Fair Lending" booklets.

The Ombudsman concluded that the statistical analyses and peer comparisons the SO relied on are sound and based on a standard methodology used by the OCC and the DOJ. The Ombudsman concurred with the SO that the application of Simpson's Paradox is not appropriate in this matter. Redlining involves unequal access to credit based on demographic characteristics of the residents of the geographic area where the credit seeker resides or will reside. It is important to consider lending activity throughout the entire REMA to see how a bank allocates resources in that area. If the REMA is disaggregated into counties for the peer statistical analysis, then the analysis will not detect potential redlining risk across counties. The bank's REMA is the appropriate geography that should be used for a redlining assessment. This is consistent with supervisory expectations and guidance.

While the CRA AA can be convenient for redlining analysis as information about it is typically already in hand, the CRA AA may be too limited. This is because redlining analysis focuses on the bank's decisions about how much access to credit to provide to different geographical areas, and some of those areas might be beyond or otherwise different from the CRA AA. The areas that those decisions can best be compared to are areas where the bank actually marketed and provided credit and where it could reasonably be expected to have marketed and provided credit.

The bank's lending penetration within the MSA in areas outside of the bank's delineated CRA AA supports including the entirety of the MSA in the bank's REMA for redlining analysis purposes. Redlining analysis compares a bank's proportion of lending, as measured by applications and originations in MNWHCTs compared to peers, not its application approval or denial rates.

The Ombudsman concurred with the SO that the bank's CRA AA excludes MNWHCTs, and this adds support for the violation determination. The bank failed to include any MNWHCTs in its CRA AA despite operating a branch in an urban county and engaging in significant lending activity outside its delineated CRA AA. The bank's volume of lending within the MSA but outside of its delineated CRA AA, including in majority White urban and suburban areas, contradicts the bank's arguments for the delineation of its AA and excluding MNWHCTs because of size or capacity constraints.

The Ombudsman concurred with the SO that the bank's decision to limit marketing and advertising activities only within its delineated CRA AA was a contributing factor in limiting the bank's lending in MNWHCTs. The bank's HMDA data demonstrated that the bank had the ability to extend credit across the MSA, but did not actively market outside of its delineated AA. The bank did not perform targeted advertising to MNWHCTs. Including marketing as a possible indicator of redlining is consistent with supervisory expectations and guidance. A clear exclusion of the suspected redlined area from the bank's marketing of residential loan products supports the view that the bank did not want to do business in the area. If sufficiently stark and supported by other evidence, a difference in marketing to racially different areas could itself be treated as a redlining violation of the FH Act. Even below that level of difference, marketing patterns can support or contradict the view that disparities in lending practices were intentional.

The Ombudsman concluded that the SO did not rely on the risk factor related to differences in services available or hours of operation at branch offices in making its violation determination; however, the SO's analysis of the bank's general branching patterns supports the violation determination. The bank's branching patterns demonstrate that it has no branches in MNWHCTs within the MSA. The bank's lending activity in the MSA outside the bounds of its delineated CRA AA and around the geographical areas with MNWHCTs contradicts the appeal's assertion that the closest MNWHCTs are located several miles away from a bank branch and are outside of the bank's REMA.

142 USC 3604(a), (b), and 3605(a); 24 CFR 100.50 and 100.120.

215 USC 1691(a)(1); 12 CFR 1002.4(a) and (b).