Last month, the Department of Justice (DOJ) filed a civil rights lawsuit accusing KleinBank, a Minnesota-based community bank, of violating fair lending laws by engaging in the practice of “redlining” by denying mortgage loans to predominantly minority neighborhoods. The DOJ’s complaint alleges that KleinBank “engaged in a pattern or practice of unlawful redlining by structuring its residential mortgage lending business so as to avoid serving the credit needs of neighborhoods where a majority of residents are individuals of racial and ethnic minorities, in violation of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).”
KleinBank is a $1.8 billion bank based in Minneapolis, Minnesota. The DOJ claims that KleinBank engaged in redlining from 2010 to 2015 by denying residents of minority neighborhoods in the Minneapolis area an equal opportunity to apply for and obtain residential mortgages. According to the DOJ, statistical analyses of KleinBank’s loan applications and originations show that the bank served majority-white neighborhoods at a significantly greater rate than majority-minority neighborhoods. Specifically, only 1.06% of KleinBank’s mortgage loan applications and 1.16% of its originations involved property in majority-minority census tracts. The DOJ also points out that comparable lenders originated four times as many loans from minority neighborhoods as KleinBank.
In addition to statistical analyses, the DOJ relies on the following facts as support for KleinBank’s alleged exclusionary practices:
- Designation of a “horseshoe-shaped” CRA assessment area that “includes the majority white suburbs, and carves out the urban areas of Minneapolis and St. Paul that have higher proportions of minority populations.”
- Locating branches and mortgage loan officers in majority-white areas instead of majority-minority areas. According to the DOJ, KleinBank has 19 branches but “has never opened or operated a branch in a majority-minority census tract.”
- Targeting advertising toward residents of majority-white neighborhoods to the exclusion of majority-minority neighborhoods.
KleinBank vigorously disputes the DOJ’s allegations and intends to defend itself against the lawsuit. Interestingly, the DOJ claims that “the FDIC has never conducted a redlining examination of KleinBank” or “commented on or approved KleinBank’s CRA assessment area.” But a review of the CRA exam ratings maintained by FFIEC shows that KleinBank has received a satisfactory rating in its four CRA exams over the last ten years, including the most recent exam in July 2016.
The ICBA recently issued a statement condemning the DOJ’s lawsuit and calling on the new administration to “curb fair lending overreach.” The statement noted that “community banks abhor illegal discrimination” but pointed out that “groundless claims, prolonged enforcement actions, and unnecessary litigation harm community banks and the customers they serve by undermining the availability of credit in local communities and throughout the economy.” The ICBA called out the KleinBank lawsuit as “misguided and baseless,” particularly in light of the fact that the bank “has never been cited for fair lending violations by its primary regulator, the FDIC.”
Although the new administration may have some impact on fair lending enforcement and litigation, redlining and ECOA compliance have been highlighted by the CFPB as enforcement priorities going forward. The government currently appears to be taking a hard-line stance in pursuing civil rights litigation even against a bank that has never been cited for fair lending violations by its regulator and has received satisfactory CRA exam ratings. This means banks must be vigilant in monitoring their compliance with fair lending laws and regulations. FFIEC provides CRA exam guidelines from the regulators, which banks should review to understand what the regulators look for in conducting CRA exams. But even CRA exam compliance may be insufficient, as the KleinBank lawsuit shows, so banks should regularly review their CRA assessment areas, branch locations, and marketing practices to ensure compliance with ECOA, FHA, and other fair lending laws.