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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 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
The appeal asserted that the bank’s activities did not warrant a determination of a pattern or practice of discrimination or illegal redlining in violation of the FH Act or ECOA and that the reports of examinations (ROE) the bank received did not state that the bank had engaged in any illegal pattern or practice of discrimination. The appeal noted that the bank complied with the applicable supervisory standards contained in the “Fair Lending” booklet of the Comptroller’s Handbook and Interagency Policy Statement. Further, the SO did not present the bank evidence, such as loan files or other documents, or credible observations by people with direct knowledge that indicates evidence of discrimination. The appeal noted that most of the loans in the bank’s portfolio were either referred by a customer or realtor, were to a long-term repeat customer, or were the result of the applicant searching the internet. The appeal claimed that the SO did not comply with ECOA, which requires first seeking the bank’s compliance with 15 USC 1691 [as noted in 15 USC 1691e(g)] before referring the matter to the Department of Justice (DOJ).
The appeal contended that there was no bank policy or practice that resulted in any disparate impact, effect, burden, or damages to a particular individual or group on a prohibited basis. The appeal also noted that people who live within the majority non-White or Hispanic census tracts (MNWHCT) in the metropolitan division (MD) were not harmed because they had access to credit from a wide variety of financial institutions. In addition, the appeal stated there were no complaints of disparate treatment, victims, or aggrieved applicants that suffered damages caused by the bank. The appeal contended that the bank did not receive meaningful feedback about, nor credit for, the corrective actions taken in response to the fair lending examination.
The appeal asserted that 42 USC 3604 does not apply because the bank does not engage in the sale or rental of housing and 24 CFR 100.125, 100.130, and 100.135 do not apply because the bank does not purchase loans, participate in loans, discriminate in the terms and conditions of the credit it offers, or sell or broker real estate.
The appeal argued that the superior performance of the bank’s “peers” in making loans in MNWHCTs is due to the capacity of significantly larger institutions that can market loan products and provide down payment assistance, which the bank argues it does not have the capacity to do, as well as due to market factors outside of the bank’s control.
The appeal asserted that the peer groups used by the SO were inappropriate and the statistical analysis was flawed. The appeal stated that the SO did not appropriately consider the bank’s low denial rates, both within MNWHCTs and in majority-White census tracts (MWCT).
The appeal asserted that the bank’s prior Community Reinvestment Act (CRA) performance evaluations never indicated that the bank’s CRA assessment area was illegally defined.
The appeal asserted that except for a targeted mailer, the bank did not actively engage in costly marketing campaigns during the review period or the COVID-19 Pandemic to any geographical areas, individuals, or groups, inside or outside of the bank’s CRA assessment area.
The Ombudsman conducted a comprehensive review of the appeal using the supervisory standards:
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 the FH Act and ECOA. The Ombudsman concluded that the following factors support the violations determination: (i) statistical analyses that demonstrated statistically significant disparities in the proportion of bank applications from and originations in MNWHCTs in the MD compared to peer institutions during the review period, (ii) the bank’s CRA assessment area delineation that excluded all MNWHCTs in the MD as well as areas where the bank conducted a substantial portion of its lending and had demonstrated a capacity to lend, (iii) the bank’s pattern of locating branches and staff only in MWCTs, and (iv) the bank’s lack of marketing and outreach efforts to potential customers in MNWHCTs in the MD. The Ombudsman further determined that the redlining factors considered by the SO are consistent with the applicable supervisory standards and the factors that other agencies, including the DOJ, rely on in bringing redlining matters.
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. 3The FH Act also prohibits making a dwelling unavailable or discriminating against a person in the provision of services or facilities in connection with the sale of a dwelling on a prohibited basis. 4ECOA 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. 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.
The SO’s decision to cite the violations was based on an analysis of the redlining factors, together with an assessment of whether the bank provided a credible and legitimate non-discriminatory explanation for its lending, branching, and marketing patterns, along with the bank’s delineation of its CRA assessment area. Overt evidence of intent to discriminate is not necessary to prove redlining. Additionally, most DOJ actions do not rely on overt evidence of intent and, instead, infer intent based on circumstantial evidence. This approach is also consistent with the Interagency Policy Statement. Furthermore, results of prior examinations and findings in prior ROEs do not prevent the SO from identifying concerns at future examinations.
The SO did not cite violations of the FH Act or ECOA based on a disparate impact theory, as the appeal asserts, but rather based on a disparate treatment theory. 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.” Also refer to page 6 of the 2010 Fair Lending Handbook and 2023 Fair Lending Handbook that states, “[t]he existence of illegal disparate treatment may be established either by statements revealing that a bank explicitly considered prohibited factors (overt evidence) or by differences in treatment that are not fully explained by legitimate nondiscriminatory factors (comparative evidence).”
The supervisory standards reflect that a “complainant,” “aggrieved person,” or “aggrieved applicant” is not required for the SO to cite violations of the FH Act or ECOA. The bank is also not relieved from liability for discrimination simply because other institutions offer their services in a particular geography. By failing to provide equal access to credit to borrowers seeking mortgages secured by property in MNWHCTs, the bank “otherwise made unavailable” a dwelling to those borrowers and discriminated in the provision of services in connection to the sale of a dwelling, in violation of 42 USC 3604.
The SO provided feedback on the bank’s corrective actions and appropriately determined that actions implemented after the review period are not relevant to the SO’s evaluation of whether the bank violated fair lending laws during the review period. Furthermore, the SO did not cite violations of 24 CFR 100.125, 24 CFR 100.130, and 24 CFR 100.135, and these inapplicable subsections of the regulation are not relevant to whether the SO appropriately applied the relevant subsections of the regulation that it did cite.
A low denial rate, as asserted in the appeal, for the small number of applications received in MNWHCTs does not mitigate the failure to offer equal access to credit in MNWHCTs. Irrespective of the bank’s denial rates for received applications, the bank significantly lagged peers in generating applications and originating loans in MNWHCTs during the review period. Furthermore, the referral standard of 15 USC 1691e(g) under ECOA is not relevant to the fair lending violations decision that is the subject of the appeal.
The Ombudsman concluded that the statistical analyses and peer comparisons the SO relied on were sound and based on a standard methodology used by the OCC. The Ombudsman determined that the statistical analyses of multiple peer groups that considered, among other factors, peer lending volume and branch presence in the geography, demonstrated that there were statistically significant disparities in the proportion of the bank’s mortgage applications from and originations in MNWHCTs in the MD compared to peers during the review period. Although the bank’s volume of applications and asset size were smaller compared to some other lenders in the peer groups, the OCC considers peer application volume and branch presence in the geography in several of the standard peer groups used for fair lending examinations. Additionally, the OCC’s practice of using several different peer groups, including peers that have a similar volume of applications, is consistent with DOJ consent orders. Finally, the bank’s lending patterns suggest it was successfully lending in MWCTs, but not in MNWHCTs in the MD, including in MWCTs that were further from its assessment area than most of the MNWHCTs.
The Ombudsman concurred with the SO that the bank’s CRA assessment area delineation excluded all MNWHCTs in the MD and did not include areas where the bank conducted a substantial portion of its lending and demonstrated a capacity to lend. A potential indicator of redlining includes when a bank’s CRA assessment area appears to have been drawn to exclude areas with relatively high concentrations of residents of a particular racial or national origin group. Prior CRA performance evaluations noted that the bank originated a majority of its loans outside of its CRA assessment area. Although the goals of the CRA and fair lending laws, FH Act and ECOA, are mutually reinforcing, they serve different purposes.
The Ombudsman concluded that the bank’s lack of marketing and outreach efforts in MNWHCTs was a contributing factor in limiting the bank’s lending in MNWHCTs during the review period. A clear exclusion of the suspected redlined area from the bank’s marketing of residential loan products supported the view that the bank did not want to do business in the area. Marketing decisions are affirmative acts to include or exclude areas. The Ombudsman found that the bank’s strategy was to primarily advertise within its delineated CRA assessment area, which only contained MWCTs, putting residents located in MNWHCTs at a disadvantage. During the review period, the bank marketed via its website and branches, which were all in MWCTs. The bank also engaged in a targeted marketing campaign; however, this campaign occurred in the bank’s CRA assessment area and did not reach any MNWHCTs. Additionally, the bank did not conduct any outreach efforts within MNWHCTs to educate residents of the bank’s residential mortgage loan products.
142 USC 3604(a), (b), and 3605(a); 24 CFR 100.50, 100.65, 100.10, and 100.120.
215 USC 1691(a)(1); 12 CFR 1002.4(a) and (b).
342 USC 3605(a); 24 CFR 100.110, 100.120.
442 USC 3604(a), (b); 24 CFR 100.50, 100.65.
515 USC 1691(a)(1); 12 CFR 1002.2(z); and 12 CFR 1002.4(a).
615 USC 1691(a); 12 CFR 1002.4(b); Supplement I to Part 1002 - Official Interpretations (Supp. I), 1002.4(b)-1.
