The Consumer Financial Protection Bureau and the Department of Justice are taking a renewed interest in redlining, the practice of lenders charging more for products or excluding altogether minorities within certain geographic areas — and their findings may be surprising.
Officials from both agencies have aggressively begun warning lenders in recent months that they are seeing potential instances of redlining, which has been prohibited for decades. That is partly because the two agencies are using a somewhat different screening methodology than other regulators that helps trigger more findings, according to sources.
But regulators said it is because they are finding more redlining in the wake of the financial crisis, which forced lenders to pull back on credit availability.
"It is biblical that there's nothing new under the sun and I often think everything old is new again. So it's funny to still be talking about redlining here in 2015 and yet here we are," said Patrice Ficklin, the CFPB's assistant director of fair lending, in speaking before the Women in Housing and Finance group on April 23. "With regard to [the Equal Credit Opportunity Act] exams, we look at a number of areas but our principal focus is in underwriting and redlining."
The CFPB has not yet taken a public enforcement action solely related to redlining. However, the CFPB's fair lending office said April 28 that it had "several open investigations of potential redlining" in progress by the end of 2014.
The CFPB is also working closely with the Justice Department on the issue. That became clear during a panel discussion earlier this year between Ficklin and Steven Rosenbaum, the Justice Department's chief of the civil rights division of housing and civil enforcement, who focused most of the conversation on redlining.
The CFPB and the DOJ "have developed and strengthened relationships in the last year and it is likely if you've got a problem with the CFPB, you're also going to have a problem with us," said Rosenbaum, during the Consumer Bankers Association annual conference in March.
Overall, Justice had opened 25 fair lending investigations by the end of 2014 and 10 of those were being done jointly with the CFPB, Rosenbaum said. Among 18 referrals they received from other agencies during that year, 15 came from the CFPB, he said.
"It is surprising to me, having done this work for the last 12 years, that we're seeing redlining creep up as a significant issue, but it is," said Rosenbaum. "We've done a lot of work to try to identify the folks who deserve our attention and there are a number of lenders who seem to be choosing to market differently in white areas than minority areas. And we've got a number of those investigations going on."
Both the CFPB and DOJ said redlining concerns have arisen again because of fallout from the financial crisis.
"In some early cases of redlining, lenders literally drew a red line on a map around neighborhoods to which they did not want to lend, giving this practice its name. Today we are focusing on redlining from an access-to-credit standpoint, particularly in light of contractions that have occurred in the wake of the Great Recession," said Sam Gilford, a spokesman for the CFPB. "We've done significant work in our supervisory space to evaluate redlining risk."
At the same time, sources said the CFPB and DOJ are employing a similar methodology in screening lenders for redlining that is slightly different from other bank regulators.
"We actually do a peer analysis and so we look at what a lender's peers are doing" in that given market, said Ficklin during the CBA conference. "And we have had instances where lenders have done very little [Federal Housing Administration] lending or a lot of FHA lending. And in our refined peer analysis, we actually compare those lenders to other lenders who have the same level or percentage of FHA lending."
If the peer comparison shows a lender having a significant disparity from similar peers in the area, then that could trigger a redlining investigation.
The CFPB screening "is different than what the prudential regulators and banks have traditionally done by looking internally at an institution's own lending across different segments of a market," said Joe Rodriguez, of counsel at Morrison & Foerster who formerly worked in the CFPB's fair lending group. "They're taking a different perspective, which makes sense at least from a screening perspective because you would generally think that if other similarly situated institutions are doing well in a certain geographic area, than the other institutions in that area should also be doing well."
Sources said the CFPB's method is more refined than looking at a sole institution's loan portfolio across markets or comparing it to aggregate figures of lenders nationwide.
"The aggregate comparison may not be adequate. You really need to compare yourself to similar peers in an assessed area," said Ed Kramer, executive vice president of U.S. regulatory affairs at Wolters Kluwer Financial Services. "You also need to look at your advertising. Are you offering the same products in each of your areas? Or are you only offering certain products in one area which may be an area the regulators are closely watching?"
Asked why the CFPB chose to develop its own system for detecting redlining, Gilford said their methods are in line with other regulators.
"In comparison with other federal financial regulators, the CFPB takes a similar overall approach to identifying redlining risk," he said. "The CFPB's fair lending reviews are consistent with established supervisory practice, and borrow from the procedures used in fair lending reviews conducted by the Federal Financial Institutions Examination Council agencies."
One of the most prominent examples to date of a joint investigation was when the CFPB and Justice Department cited Synchrony Bank last June partly for a legacy program from GE Capital Retail Bank that blocked Hispanics from accessing a debt-relief program provided to other customers. Synchrony agreed to pay $225 million, making it the largest settlement of a credit card discrimination case for the authorities.
"That case was not about whether the information was being provided in Spanish or not, it was about excluding people from the program who could have benefited but did not because they spoke Spanish," Rosenbuam said.
The case also signaled that redlining is not just typically applied to mortgages, but can span other financial products like credit cards, auto loans or even mortgage servicing.
Not everyone is surprised that redlining cases are cropping up again.
Redlining has "always been a part of the arsenal of enforcement agencies," said Paul Hancock, a partner at K&L Gates. "And it's really important for lenders to do their own evaluation of loans to make sure they are not susceptible to potential redlining cases."
Lenders could also face an increase in redlining investigations after the CFPB finalizes its proposed changes to the Home Mortgage Disclosure Act. Lenders will be required to submit more data fields about their home loans, which could provide more evidence to regulators of potential redlining.
"The proposed changes to HMDA will provide more insight to the CFPB, with regard to its fair lending enforcement efforts. I also anticipate that the CFPB will increase its scrutiny for fair lending from a mortgage servicing perspective Before the housing crisis, there was not a great deal of emphasis placed on alleged disparities in mortgage servicing. That is new from a redlining perspective," said Dana Lumsden, a litigation partner and member of the financial services practice group at Bradley Arant Boult Cummings. "I see the proposed HMDA changes as HMDA on steroids by adding new components to redlining concerns."
When asked about the HMDA changes during the Women in Housing and Finance symposium, Ficklin refrained from setting a timeline for when the proposal would be finalized. However, she said once it was in place it would be significant.
"The current HMDA allows decent risk analytics with regard to redlining" but the proposal "could be a very significant game changer," she said. "It could enable us to do risk-based assessment with regard to reverse redlining" as well.
