Redlining probes created millions for originations: DOJ

The country's top law enforcement officers are reaching redlining settlements with mortgage lenders at a record pace, agreements they claim have and will generate significant mortgage originations.

The Department of Justice has reached almost $85 million in redlining settlements with financial institutions since 2021, according to a top prosecutor last week in an event at Seton Hall Law School in Newark, New Jersey. The DOJ since 2021 has reached six redlining agreements, its busiest two-year stretch ever, and last year received the most referrals for redlining perpetrators it ever had, said Kristen Clarke, assistant attorney for Civil Rights at the DOJ.

"In the upcoming months we will continue to hold all types of mortgage lenders, not just traditional banks, but also mortgage companies and credit unions, accountable when they engage in discriminatory redlining practices," she said. 

The DOJ, Consumer Financial Protection Bureau and other regulators have reached increasingly larger deals with lenders over the accusations, including a record-$31 million agreement in January with Los Angeles-based City National Bank. Companies accused of discouraging minorities from obtaining home loans have denied the allegations in settlements but have pledged millions of dollars to loan and subsidy funds for the groups.

Every dollar in subsidy funds equates to approximately 10 times that amount in actual value, Clark said. 

"So for example, a $15,000 loan subsidy to one homebuyer can often enable that person to acquire a $150,000 loan that would perhaps otherwise be unobtainable," she said. "If these numbers hold true, the value of our cases so far could approach about a billion dollars in total relief."

A $27 million redlining action in 2015 against Hudson City Savings Bank, which dedicated the majority of funds to loan subsidies in impacted communities, has generated more than $515 million of total loan amounts for majority Black and Hispanic neighborhoods, Clark said.

More recently, Oak Ridge, New Jersey-based Lakeland Bank reached a $13 million settlement with the DOJ over allegations of redlining in the Newark metropolitan area. The agreement, along with subsidy funding, also mandates education campaigns, two new bank branches in neighborhoods of color and at least four loan officers for those areas.

"As mayor, we're not just interested in punishing people who participated in and are participating in this act, we're actually looking for repair," said Ras Baraka, mayor of Newark. "We just want it to be very quantifiable, we want it to be material. We want families to be able to go into homes."

CFPB Director Rohit Chopra, speaking at the event, repeated the regulator's skepticism of machine learning and artificial intelligence in lending decisions, and said it's trying to determine ways to prosecute what he described as "digital redlining." Probes into the alleged activity have to follow the data alongside following the money, he said.

The director also brought attention to reverse redlining, or predatory targeting, citing Trident Mortgage which last year was hit with a $24.4 million fine for allegedly avoiding business in non-white neighborhoods.

"We found that it wasn't really just denying people, it's actually taking steps to deter them from applying in the first place," said Chopra. "And that to me is very dangerous. So I want to make sure that we're not looking at the old toolkit."

Not all redlining prosecutions have been successful. An Illinois federal judge in February handed a victory to Townstone Financial in a redlining complaint from the CFPB, judging the regulator had overstepped its authority under the Equal Credit Opportunity Act. The CFPB said it would file an appeal, despite the judge's dismissal with prejudice preventing further action.

Other lenders meanwhile have taken steps to address the racial homeownership gap by developing special purpose credit programs. Bank of America, JPMorgan Chase and Wells Fargo, and non-bank lenders Rocket Mortgage and Guaranteed Rate have doubled down on SPCP efforts in the last year. 

Wells meanwhile is facing a class action complaint from Black borrowers, who allege the bank practiced discriminatory lending as they sought to obtain home loans and refinances during the ultra-low rate environment during the coronavirus pandemic. A federal judge in January allowed several similar complaints against Wells to be consolidated, and the sides are due to discuss a case schedule in a May hearing.

Clark applauded lenders' efforts with SPCPs, but also emphasized the DOJ's work to pursue more redlining perpetrators in cases which use an immense amount of resources.

"For the banks and financial institutions not motivated to voluntarily take these steps," she said, "I hope that they will take this program today as a strong message that the federal government will work to hold you accountable when you engage in modern day redlining."