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A bank supervised by the Office of the Comptroller of the Currency (OCC) filed a formal appeal with the Ombudsman, disputing fair lending violations cited in a supervisory letter. Specifically, the bank appealed the supervisory office’s (SO) determination that it 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
The appeal asserted that the evidence cited by the SO does not meet the standard of proof and does not follow applicable supervisory guidance. The appeal asserted that the SO failed to prove intentional discrimination and did not meet the high burden of proof required to support the cited violations of law. The appeal contended that the SO did not comply with guidance within the “Fair Lending” booklet of the Comptroller’s Handbook for performing a redlining analysis. Specifically, the SO did not prove overt evidence of an intent not to serve communities based on the prohibited basis characteristics of those communities or comparative evidence of a bank's lending-related activities in minority and non-minority communities. The appeal also asserted that the methodology did not align with the “Interagency Policy Statement on Discrimination in Lending,” which defines redlining as “refusing to make residential loans or imposing more onerous terms on any loans made because of the predominant race, national origin, etc., of the residents of the neighborhood in which the property is located.”
The appeal challenged the reliability of the SO’s statistical analysis, arguing that the peer group selected did not reflect the bank’s unique business model and product offerings. The appeal claimed it outperformed the majority of lenders in the metropolitan statistical area (MSA) and individual counties in terms of the number of loans originated in majority non-White or Hispanic census tracts (MNWHCT) during the review period. The appeal also maintained the SO failed to properly account for the bank’s Community Reinvestment Act (CRA) assessment area delineation and the location of its branches, asserting these factors did not support a finding of redlining. Further, the bank argued that the SO did not demonstrate any “affirmative act” of “excluding or omitting” the suspected redlined area from the bank’s marketing and failed to properly account for the bank’s advertising.
The Ombudsman conducted a comprehensive review of the appeal using the following supervisory standards in effect at the time of the examination including:
The Ombudsman concurred with the SO's determination to cite violations of the FH Act and ECOA.
The FH Act prohibits discrimination in the making or purchasing of residential real estate-related loans on the basis of several factors, including race, color, or national origin.3 The FH Act also prohibits making a dwelling unavailable because of a prohibited basis or discriminating against a person in the provision of services or facilities in connection with the sale of a dwelling on a prohibited basis.4 ECOA prohibits creditor practices that discriminate against any applicant with respect to any aspect of a credit transaction on a prohibited basis, including race, color, or national origin.5 ECOA and its implementing regulation also prohibit creditors from making any oral or written statement to applicants or potential applicants that would discourage, on a prohibited basis, a reasonable person from making or pursuing an application.6
Redlining is a form of illegal disparate treatment in which a bank provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area where the credit seeker resides or will reside or based on where the residential property to be mortgaged is located.7 Redlining may violate both the FH Act and ECOA. Redlining can be proven by either overt evidence of discrimination or evidence of different treatment based on the racial or ethnic composition of residents in the applicable geographic areas.8 The Interagency Policy Statement states the following regarding the theory of disparate treatment, which can be used to prove redlining, “Disparate treatment occurs when a lender treats a credit applicant differently based on one of the prohibited bases. Disparate treatment ranges from overt discrimination to more subtle disparities in treatment. It does not require any showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself. It is considered by the courts to be intentional discrimination because no credible, nondiscriminatory reason explains the difference in treatment on a prohibited basis.”9
The Ombudsman found that the bank engaged in redlining in violation of the FH Act and ECOA. The facts and conclusions supported the determination that the bank engaged in redlining. The supervisory record supported that the bank did not provide equal access to credit to applicants seeking mortgage loans secured by properties in MNWHCTs in the MSA. The SO proved lender discrimination under the FH Act and ECOA through statistical modeling and comparative analysis that identified patterns of disparate treatment.
The SO’s use of redlining factors was consistent with applicable supervisory standards and factors that other enforcement agencies, including the U.S. Department of Justice (DOJ), rely on when reviewing redlining matters. The following factors supported the violations determination: (i) statistical analyses that demonstrate statistically significant disparities in the proportion of bank applications from and originations in non-White census tracts in the MSA compared to peer institutions during the Review Period, (ii) the bank’s branching patterns, and (iii) inadequate marketing and outreach efforts to potential customers in non-White communities in the MSA. The presence of discriminatory intent, while required, need not be overt, and in this case, could be inferred from the lack of a credible, nondiscriminatory explanation that the disparate treatment is nondiscriminatory.
The Ombudsman determined that the peer comparison and statistical analysis used in this case were reliable and appropriately applied. Although the bank submitted its own analysis using an alternative peer group, this peer group was not suitable because the peer institutions differed significantly from the bank in product offerings, business model, and market presence. The bank’s emphasis on total loan volume rather than proportional performance also distorted the comparisons. The “Fair Lending” booklet of the Comptroller’s Handbook emphasizes that redlining analyses should be based on proportions to properly account for market presence and scale. The Ombudsman conducted multiple additional statistical analyses to test the SO’s conclusion and address the concerns outlined in the appeal. These analyses incorporated various criteria to create additional peer groups, including lending strategy, product offerings, and primary lending communities. Other criteria considered in constructing the peer groups included bank asset size, branch presence, application volume, origination volume, share of the portfolio and conforming loans, and total share of applications. All additional peer comparisons resulted in statistically significant disparities. The Ombudsman also found that the SO reasonably relied on MSA-level data rather than county-level comparisons, which is consistent with guidance to evaluate a bank’s entire reasonably expected market area when conducting redlining analyses.
The Ombudsman determined that the SO appropriately considered, but did not rely exclusively, on the bank’s CRA assessment area delineation in reaching its conclusion. Although the SO found no concerns with the delineation itself, this factor was only one component of a broader, multifactor analysis.
The Ombudsman also concurred with the SO’s consideration of the bank’s branching patterns. Nearly all branches were located in non-MNWHCT areas, with minimal presence in MNWHCTs. The bank’s lending activity reflected limited penetration into MNWHCTs, further supporting the redlining determination.
Finally, the Ombudsman concurred with the SO’s evaluation of the bank’s marketing and outreach efforts, which revealed insufficient engagement with MNWHCTs. While the bank advertised in some minority-focused publications, its overall strategy was ineffective in reaching MNWHCTs. The bank did not assess the effectiveness of its marketing or implement meaningful targeted outreach. The absence of such efforts, when considered alongside branch placement and lending disparities, supported the conclusion that the bank made credit services available on unequal terms, consistent with redlining under the FH Act and ECOA.
1 42 USC 3604(a), (b), and 3605(a); 24 CFR 100.50 and 100.120.
2 15 USC 1691(a)(1); 12 CFR 1002.4(a) and (b).
3 42 USC 3605(a); 24 CFR 100.110, 100.120.
4 42 USC 3604(a), (b); 24 CFR 100.50, 100.65.
5 15 USC 1691(a)(1); 12 CFR 1002.2(z); and 12 CFR 1002.4(a).
6 15 USC 1691(a); 12 CFR 1002.4(b); Supplement I to Part 1002 - Official Interpretations (Supp. I), 1002.4(b)-1; see also CFPB v. Townstone Fin. Inc., No. 23-1654, 2024 WL 3370023, at *1 (7th Cir. July 11, 2024) (holding that ECOA authorizes the “imposition of liability for the discouragement of prospective applicants.”).
7 2023 Fair Lending Handbook at 8.
8 2023 Fair Lending Handbook at 42-43; Interagency Policy Statement, 59 Fed. Reg. at 18,266, 18,268.
9 Interagency Policy Statement, 59 Fed. Reg. at 18,268.
