In a Feb. 9 BankThink article discussing a path forward for the Department of Justice’s civil rights division under President Trump, Paul Hancock claims that the Obama administration pursued too many fair-lending claims against banks and lenders, exceeding the statutory bounds of fair lending enforcement. In his view, these cases lacked adequate proof. But his op-ed overlooked clear evidence that financial institutions’ methods targeted in these actions were discriminatory, and that the regulatory approaches to address this discrimination meet current legal standards.
Particularly during Black History Month, everyone should be reminded that issues related to discrimination by lenders and how the government enforces fair-lending standards are not new, nor are they resolved. It took sustained efforts to enact laws that recognized systemic harms. Even today, enforcement actions are needed to ensure fair-lending compliance. For instance, in spite of decades of legal and regulatory action on the issue of interest rate markup in auto lending, the Consumer Financial Protection Bureau and the Department of Justice found that some lenders lacked a fair-lending compliance system for auto lending.
The statistical tools the CFPB and DOJ used in the prior administration to look for fair-lending violations are statistically valid. Their legal approach is sound, and would withstand court scrutiny. The statistical analysis that the CFPB uses to determine the representation of borrowers of color within a particular set of loans and identify potential disparities is widely accepted in lending and in other markets as a means to scan for potential disparate impact of particular policies or decisions. In fact, in one of the settlements between the CFPB, DOJ and an auto lender, the number of actual claimants and the estimate gained from the statistical analysis used were virtually identical. That is evidence of a statistically sound approach.
Evidence of widespread discrimination in auto lending dates back to at least the mid-1990s; a series of class action lawsuits pointed to how lenders provide dealers with the ability to add to the interest rate for compensation and how that interest rate markup led to significant disparities. More recently, CFPB and DOJ settlements with Ally Financial, American Honda Finance, Toyota Motor Credit and Fifth Third Bank indicate persistent differences between the additional interest paid by borrowers of color and that paid by white borrowers.
Although dealers are the party in direct contact with borrowers, the Equal Credit Opportunity Act is clear that an assignee of a retail installment contract that participates in the lending decision is liable for violations on that loan. Auto lenders set the terms of the loan, and also provide the dealer the ability to adjust the interest rate. Lenders have known for decades that this practice has engendered discriminatory impact, but have taken little action to do anything about it.
Indeed, some lenders simply chose to look the other way. In certain enforcement actions, the CFPB noted that some lenders had no fair-lending controls to monitor for potential discrimination. Lenders are well aware of what their dealers are charging, and have the data and the wherewithal to comply with the law.
The evidence in the car lending cases effectively shows that the ability provided to the dealer to adjust the interest rate on car loans results in measurable disparities, which is not caused by other factors. Using a statistically valid analysis, the CFPB has identified a specific practice that, if eliminated, would eliminate the disparities. As such, the CFPB’s approach meets the test for proving disparate impact.
Describing the Obama administration’s efforts as overreaching or “social engineering” designed to ensure “equal distribution” of loans between races — to quote from Hancock’s perspective — resembles arguments made by the industry that seem aimed at sweeping fair lending violations under the rug. These descriptions are offensive to communities of color who are denied banking services or charged more than white borrowers.
Recent redlining cases provide clear evidence of lending practices, marketing decisions and branch location decisions that serve to either exclude or unfairly treat communities of color. Pointing to a bank or lender’s arguments for why it didn’t mean to exclude them does not relieve companies of their legal duties and does nothing to solve the persistent issue of unequal access in banking for communities of color. The law requires banks and lenders to look at whether their decisions result in discriminatory impact.
For instance, in an action against Hudson City Bank, the CFPB and DOJ alleged that during its 2004-2010 branch expansion, the bank focused on areas that “exclude and form a semicircle around the four counties in New York with the highest proportions of majority-Black-and-Hispanic neighborhoods.”
According to the joint CFPB/DOJ order, 94% of Hudson City’s “branches opened or acquired as a result of this expansion effort were outside of majority-Black-and-Hispanic neighborhoods.” The bank located all of its loan officers outside of those areas as well, the order said.
In another joint redlining action against BancorpSouth, the CFPB and DOJ alleged that the bank “illegally denied fair access to credit to residents in minority neighborhoods in the Memphis area.” The order said BancorpSouth opened branches and targeted marketing outside of minority neighborhoods, which discouraged prospective borrowers in those areas “from applying for credit.”
The BancorpSouth case also suggested more overt discrimination by the bank. The complaint alleges that the bank “unlawfully denied African-American applicants certain mortgage loans and overcharged some of its African-American customers.”
The consumer bureau said it had sent “undercover testers” into BancorpSouth branches to inquire about a loan. The CFPB “found that BancorpSouth employees treated African-American testers worse than they treated white testers with similar credit qualifications,” the agency said. “For example, Bank employees provided information that would have restricted African-American testers to smaller loans than white testers.”
The maps of branch locations released with these cases evoke a stark similarity to redlining maps from the 1930s. The facts of these cases simply cannot be explained by institutions claiming they were responding to customer preferences or competitive forces. Anyone looking at these maps can see the clear exclusion of communities of color. This should serve as a call to banks and lenders to look at whether their own decisions are further adding to the problem rather than attack law enforcement for doing its job.
Along with redlining and fair-lending violations in auto lending, a 2014 CFPB order against Synchrony Bank/GE Capital related to debt settlement promotions found that “GE Capital did not extend these offers to any customer who indicated that they preferred to communicate in Spanish or had a mailing address in Puerto Rico, even if the customer met the promotion’s qualifications.” Fair-lending issues are a problem throughout the system.
The issue of fair lending is nothing new, but banks and lenders have not been accustomed to robust fair-lending enforcement. A number of banks and lenders may be hoping that the new administration will curb these actions and return to a time when regulators chose not to make fair-lending enforcement a priority. But for the millions of families denied access to credit or banking services or unnecessarily charged more for loans due to their race or ethnicity, any retreat now will simply deny them justice under the law.