KleinBank ended up making a "business decision" to move past the federal government's redlining charges.

The $2 billion-asset bank on Tuesday agreed to pay out $600,000 and open a branch in Minneapolis — a market it had largely steered clear of over its 111-year history — in order to end a three-year dispute with the Justice Department. In return, the Chaska, Minn., bank, which did not admit any wrongdoing, escaped more severe penalties sought by the government.

The Justice Department filed a lawsuit in January 2017 alleging violations of the Fair Housing Act and Equal Credit Opportunity Act. The Minnesota Bankers Association, joined by 40 other banking trade groups, replied with an amicus brief in June backing KleinBank.

The end result proved to be a mixed bag for bankers who might be targeted next.

“I think bankers would have preferred to see what you might call a pure victory, but fighting the government is such a heavy charge,” said Joe Witt, MBA's president and CEO. Still, Witt said the decision to settle was "a good one" for the bank.

"The Department of Justice is obviously a formidable opponent," Witt added.

KleinBank is the latest bank to agree to pay fees, offer new products or open branches to resolve redlining claims. Many of the financial hits have been small, often less than $1 million, though Hudson City in Paramus, N.J., agreed to pay out $33 million, including a $5.5 million fine in 2015.

Legal fees were starting to add up, said Doug Hile, KleinBank's CEO, noting that those costs played a big role in the decision to settle. He did not disclose the total amount his bank spent on the matter.

KleinBank has paid more than $1.1 million in legal fees since 2016, according to call reports filed with the Federal Deposit Insurance Corp. The government informed the bank that it was under investigation in May 2015.

“At the end of the day, you really have to look at the cost of trying to defend yourself [and] the opportunity cost of not using those resources to grow your business,” Hile said. “We felt it was better to reach a settlement ... and find ways to put our resources into supporting these inner-city communities.”

The government’s complaint alleged that KleinBank had effectively redlined Minneapolis by serving only majority white suburbs while avoiding more diverse census tracts inside the city limits. As a result, only 62 of the more than 5,800 mortgage applications KleinBank received between 2010 and 2015 came from so-called majority-minority census tracts.

KleinBank vigorously contested the conclusion, noting that its business model had traditionally focused on Carver and Scott counties, not Hennepin — which includes Minneapolis — where the bank controls just 0.1% of the $111 billion deposit market. Hile added that 31 banks, including Wells Fargo, U.S. Bancorp, Bank of America and TCF Financial, have larger market share, demonstrating Hennepin County isn't underserved.

"These accusations came out of a statistical analysis that really didn’t understand our business model or where we operated,” Hile said.

The case was closely watched because the Justice Department seemed to be pushing the envelope by pursuing instances of alleged discrimination, Witt said.

The government “never really focused on proving the bank made decisions because of race,” Witt said. “They said the map was the evidence of illegal discrimination. How can a map prove all the different factors the bank considered when it set its trade area."

“The government was on shaky ground when it claimed that a bank that operated exclusively in the suburbs for over 100 years was 'redlining’ by not also marketing to a distinct metropolitan market well served by larger banks; hence the favorable terms the government agreed to,” John Lundquist, a lawyer representing KleinBank, wrote in an email.

John Gore, acting assistant attorney general for the Justice Department's Civil Rights Division, said in a press release Tuesday that the agency “would continue to use its enforcement authority to combat” redlining. The statement never indicated that KleinBank had engaged in any wrongdoing.

The Justice Department declined additional comment.

KleinBank, as part of the settlement, will invest $600,000 on marketing and credit programs in predominantly minority neighborhoods. The Justice Department's lawsuit had asked for a civil money penalty and cash damages for potential redlining victims, among other things.

For Hile, preserving the privately held bank’s reputation was always the biggest objective.

“We’re a family business,” Hile said.

“We’ve had nothing but collaborative relationships with government officials over the years," he added. "The idea that we have engaged in an activity like redlining … was very hard for us to accept. We did not feel like we were, so we had to defend ourselves and defend our reputation.”

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.