Redlining settlement with Trustmark came much too late

The heads of the U.S. Department of Justice, Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency congratulated each other at a celebratory press conference after the recent Trustmark National Bank settlement involving federal allegations of redlining and lending discrimination in Memphis, Tennessee. But a careful replay of this case shows that it should have been filed four years ago, after the OCC first uncovered these problems during a routine Aug. 8, 2016, Community Reinvestment Act exam.

Such a timely action would not only have allowed that bank to get its fair-lending house in order by now, but, more important, would have resulted in increased home lending and branches in majority-minority communities prior to the recent pandemic and recession.

Why didn’t these federal agencies file this case sooner?

The short answer is politics. The longer answer is the unprecedented relaxation of both CRA and fair-lending enforcement rules by the OCC after President Trump took office in 2017.

The OCC’s consent order focused on alleged disparate lending and branching in Memphis from 2014 to 2016, but the consent order by the CFPB and DOJ went through 2018.

The OCC’s 2016 public CRA performance evaluation covering the 2013-2015 period resulted in a rare failing “needs to improve” CRA rating for the Memphis market. That exam repeatedly described the bank’s lending and branching in Memphis’s low- and moderate-income (LMI) areas as “very poor.”

The 2016 exam made the very unusual disclosure that “information made available on a confidential basis during its consultations” revealed apparent discriminatory or other illegal credit practices, but they were not described. Rather, the exam stated that based on actual or committed “corrective action,” as well as policies and procedures to “prevent the [undisclosed] practices,” the overall CRA rating would not be lowered, as is typically the case when there is a fair-lending violation. I have read tens of thousands of CRA exams, and for me this language was a first.

Even more unusual was the OCC’s statement that it would consider evidence of “any discriminatory or other illegal credit practices” provided by other regulators before the end of the next exam, as if it was leaving the door open to revisit the undisclosed practices in question. Instead of evaluating the bank’s CRA performance, it raised many unanswered questions about it.

The August 2016 CRA exam would normally have been released in 2017, but the fact that it was not released until July 2018, more than two years later, suggests some behind-the-scenes negotiations between the bank and the OCC, or perhaps there was debate within the OCC itself.

Trump’s new comptroller significantly liberalized the OCC’s previous CRA downgrade policy for fair-lending violations on October 12, 2017. Unlike the Federal Deposit Insurance Corp. and Federal Reserve, the OCC would only downgrade an overall CRA rating if there was a “logical nexus” between the rating and evidence of fair-lending violations. The OCC would also consider a bank’s previous CRA record as well as “remedial action” taken regarding alleged violations. The OCC has since rescinded that change along with the OCC’s CRA reform package.

The OCC (but not the FDIC or Federal Reserve) further liberalized its CRA exam policy on June 15, 2018, by closing CRA exams even if a fair-lending investigation was underway, and by preventing any retroactive CRA downgrades for such violations. That policy also allowed a more lenient approach to evaluating branch locations, stating that a branch in a non-LMI area might serve LMI people.

These two OCC policy changes before the release of Trustmark’s satisfactory rating in July 2018 were lifesavers, since an overall failing CRA rating, which only 2% of banks receive, would not only have brought unwanted attention to their undisclosed fair-lending issues but would have also shut down their ambitious expansion plans.

With the liberalized CRA and fair-lending policies in place, Trustmark’s next exam, dated June 24, 2019, went much more smoothly, earning it another satisfactory rating. This was despite the fact that it covered lending and branching practices over the same 2016-2018 period that was the subject of the recent consent orders. The 2019 exam, which also upgraded the bank’s Memphis rating, resulted in a clean bill of fair-lending health, since the OCC did not identify any discriminatory or other illegal credit practices.

Everything seemed to be going well for Trustmark … until the 2020 presidential election. CRA and fair lending should NOT be about politics, but that is exactly what happened here.

The liberalized CRA and fair-lending policies under Trump’s OCC allowed Trustmark to go on with business as usual for four years instead of receiving a deserved CRA downgrade, fair-lending violation, DOJ referral and ultimate consent order. Had Trump been reelected, this would likely be nothing more than an unread footnote in my recorded history of CRA.

President Biden ultimately got the fair-lending justice that the OCC examiners wanted since their 2016 exam. This case will be remembered as a turning point in fair-lending enforcement with the DOJ’s new Combating Redlining Initiative.

Despite the $5 million penalty, $4 million in loan subsidies and millions more in legal and other fees and expenses, Trustmark is moving forward with several positive changes, including the recent addition of two minority directors, to enable it to better serve all of its customers and communities. Absent politics, all of this would have been done four years ago.