Motor City Case Raises Red Flags on Redlining

Last week the Department of Justice reached a settlement with Citizens Republic Bancorp in a lawsuit alleging redlining discrimination in Detroit. The suit said Citizens violated fair-lending laws by serving the credit needs of predominantly white neighborhoods to a significantly greater extent than the credit needs of majority black neighborhoods.

Thomas Perez, assistant attorney general in charge of the Justice Department's civil rights division, was quoted in the Detroit News as calling the settlement "innovative" and saying it may serve as a model in other areas. He said the department was involved in 60 cases nationwide concerning similar accusations of discriminatory lending.

The $3.6 million settlement includes provisions under which Citizens will open a loan production office in a majority black neighborhood, partner with the City of Detroit to administer a $1.625 million grant program for existing homeowners, invest at least $1.5 million to increase residential mortgage credit in majority black census tracts and spend $500,000 for outreach and financial education.

The settlement crystallizes several trends of interest to banks concerned about redlining and other fair-lending matters:

  • You buy it, you own it, warts and all. The Federal Reserve referred the matter to the Justice Department based on its finding that Citizens had engaged in a pattern or practice of redlining from 2006 to 2008. That finding was predicated in large part on lending data from Republic Bank, which merged with Citizens in 2007. Nevertheless, the Justice Department alleged that Citizens, by not adequately addressing Republic's redlining patterns and practices, continued them.
  • The Justice Department wants banks to have a physical presence in the inner city. The settlement provides that Citizens' new LPO must "bear signage similar to that used for Citizens Bank branch offices [and be] in a retail-oriented space in a visible location." While the settlement acknowledges that opening a full-service branch in Detroit is not feasible now given Citizens' financial condition and Detroit's weak economy, it also contains provisions that could allow for the Justice Department to require Citizens to open such a branch. Citizens must continue to evaluate the feasibility of a branch in a majority-black census tract and regularly report its evaluations to the Justice Department. The settlement ominously provides that the "United States reserves the right to move this Court to impose an appropriate remedy in the event that the parties cannot reach an agreement regarding the feasibility" of opening a branch in a majority-black census tract.
  • CRA assessment-area delineations can be used against you in a court of law. After its merger with Republic, Citizens adopted Republic's Community Reinvestment Act assessment area for metropolitan Detroit. According to the Justice Department complaint, that delineation "formed a virtual horseshoe around and excluded most majority-black census tracts in the City of Detroit."
  • Fair-lending compliance trumps CRA compliance. In its public performance evaluation of Citizens' CRA compliance, the Fed called its CRA performance "satisfactory." However, because of its alleged noncompliance with the fair-lending laws, its rating was lowered to "needs to improve."

Here are broad recommendations for banks:

  • Address any fair-lending exposure that may result from an acquisition or merger. Citizens may have been able to mitigate its exposure to Republic's disparities had it expeditiously identified and addressed any concerns. The Justice Department's complaint focused in part on Citizens' post-merger activity, noting that it opened a limited-service ATM in Detroit "well after the Board started its fair-lending examination" and that it failed to include Detroit in its CRA assessment area until after the Fed informed Citizens that the delineation violated the CRA and the Justice Department informed Citizens of its redlining investigation.
  • Review your branch locations. Citizens has a major presence in the Detroit metropolitan area, but no branches in Detroit itself. This raised a red flag to banking regulators and the Justice Department, which said Citizens "engaged in a race-based pattern of locating or acquiring branch offices." Institutions with little or no branch presence in an inner city but a considerable presence elsewhere in the same metropolitan area should consider expanding their branch system to the inner city.
  • Delineate your CRA assessment area so it does not exclude majority-minority census tracts. The Justice Department cited Citizens' "horseshoe"-shaped CRA assessment area, which excluded most of Detroit, as evidence of its intent to redline. Banks should include whole cities, counties or metropolitan areas in their CRA assessment areas to avoid delineations that translate into maps showing that adjacent high-minority areas are not part of the banks' community.
  • Make sure your internal assessment of fair-lending performance addresses redlining charges. In addition to reviewing branch locations and CRA assessment areas, banks should monitor loan data to determine whether an appropriate volume of applications and originations emanate from minority areas and individuals. You should also be able to demonstrate involvement with community development and advocacy organizations and ensure that any public pronouncements on service strategies include minority areas and residents. The Justice Department cited as evidence of redlining a Citizens SEC filing that omitted Detroit from the areas it planned to serve.

Regulatory emphasis on fair lending will continue to increase with stepped-up enforcement from the Justice Department, the new Consumer Financial Protection Bureau and increasingly active state attorneys general. Banks can learn about enforcement trends from public fair-lending settlements and use that knowledge to adjust their own fair-lending compliance efforts.

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