WASHINGTON — An aggressive push by the Justice Department to investigate fair lending claims is prompting a backlash from bankers who claim the government is abusing its authority and contradicting findings by other federal regulators.
In part as a reaction to the financial crisis, the Obama administration has targeted banks for alleged redlining and other fair lending violations to an extent not seen since the Clinton administration.
But critics charge the effort has gone too far, claiming Justice has misused legal interpretations to bring complaints to court, alleged redlining in areas outside a bank's market area and encouraged loans to unqualified borrowers as part of expensive settlements. They also said the government is too focused on community banks instead of Wall Street firms.
"'Witch hunt' is too mild a term to use for what the Department of Justice is doing to basically community banks. I would call it extortion," said Camden Fine, the president and chief executive officer of the Independent Community Bankers of America. "It's an abuse of governmental power over smaller banks that are basically too small to fight back."
But others counter that the banking industry is overreacting. They said the emphasis on fair-lending issues during a Democratic administration is not surprising — few cases were tried during the Bush administration — especially given the recent financial crisis.
John Taylor, president and chief executive of the National Community Reinvestment Coalition, said some bank claims are overblown. For example, he disputed the notion that the Justice Department is extracting settlements that push banks to underwrite loans that are highly risky.
The government "would never agree that … lenders make loans to people who cannot afford to pay them back," Taylor said.
At issue is the launch last year of a special fair-lending unit within Justice's civil rights division, tasked with enforcing laws such as the Fair Housing Act and Equal Credit Opportunity Act and investigating claims of bank discrimination in their credit policies.
Typically, such claims originate when a bank's primary regulator refers suspicious practices to Justice. The department has said such referrals ballooned following the crisis. The civil-rights division received 49 last year, which was more than in the prior 20 years combined.
In remarks last year about the new unit, Assistant Attorney General Thomas Perez, who leads the civil rights division, suggested the department's fair-lending authority had been underused in the prior administration.
"As part of the administration's efforts, the division is dusting off the Fair Housing Act and the Equal Credit Opportunity Act, using them to combat those forms of discrimination that serve to keep our nation and our communities divided," Perez said.
Justice investigations launched in 2009 and 2010 to look into alleged fair-lending violations are only recently starting to bear results. Between 60 and 70 enforcement proceedings are said to be in the pipeline, and some banks have already settled. Alleged offenses run the gamut, experts said, from minority borrowers facing higher costs or fewer credit options than white borrowers, to their being steered into unaffordable loans.
For example, Citizens Republic Bancorp Inc., and its $9.5 billion-asset Citizens Bank subsidiary, in Flint, Mich., settled in May over credit practices the government said benefited white neighborhoods in the Detroit area over African-American neighborhoods. The company agreed to open a loan production office in an African-American neighborhood, and invest over $3 million in Wayne County.
The $1.1 billion-asset Midwest BankCentre outside of St. Louis settled last month over similar charges. The bank agreed to open a full-service branch in an African-American neighborhood, and invest about $1.45 million in minority areas of the metropolitan region. In both cases, the banks — while agreeing to the terms — still denied violating the law. (Spokespersons for both banks declined to comment for this story.)
Some in the industry said the early settlements and other pending actions demonstrate the government is going too far, and the recent settlement awards, which boost resources for banking services in underserved areas, suggest prosecutors are trying to aid lower-income neighborhoods rather than just enforcing the law.
"These types of enforcement efforts are results-oriented and tantamount to demands for racial loan quotas," said Paul Hancock, who once ran the fair-lending unit for the DOJ under former Attorney General Janet Reno and is now defending banks against prosecution as a partner at K&L Gates.
"Such extremism has always been harmful to civil rights enforcement because of the backlash that it causes. It is more akin to social engineering than fair civil rights enforcement, and that simply doesn't work."
Others, though, seem to be cutting the Justice Department more slack.
Robert Rowe, a vice president and senior counsel at the American Bankers Association, agreed the recent settlements include damages that "don't follow the traditional idea of, 'If you've done something wrong, you compensate the person you have wronged directly.'"
But he added that while an overly aggressive regime could make banks — nervous about committing fair-lending violations — even more reticent to lend to anyone, it is too soon to say whether the current enforcement cycle has reached that point.
"I've talked to Tom Perez. He wants to do the right thing. He said he really wants to work with the industry," Rowe said. "The real concern is not to create a chilling effect."
Yet some also assert the Justice Department is pushing the bounds of what constitutes redlining or other crimes. The department has revived use of "disparate impact" in targeting a bank. The term means a bank can be cited simply if a credit policy — while not intending to hurt minority borrowers — had the impact of putting minorities at a disadvantage.
"A classic example is when a bank says, 'We're not going to make loans where the house is older than 50 years old.' It just happens that the housing stock that is that old happened to be primarily occupied by African-Americans," said Rowe.
Daniel Wheeler, a lawyer at Buchalter Nemer, said while fair-lending investigations are "relatively infrequent" compared to other enforcement actions, being cited for problems that were unintentional can leave bankers frustrated and angry.
"For banks that do end up dealing with Justice, it can be very disconcerting, even insulting, because you have a big stamp of racism put on the institution," Wheeler said. "And these are largely inadvertent problems. A pattern has crept up but no one set it in place."
While Rowe said "disparate impact" was used in cases tried during the Clinton administration, others say the Justice Department has pushed the envelope this time around.
"It's a more aggressive fair-lending enforcement approach now … both because of the use of the 'disparate-impact' theory, because of the greater frequency of cases and investigations, because of the increased resources they're devoting to it and because of the increased magnitude of the demands," said Andrew Sandler, a partner at Buckley Sandler LLP. "In all of those respects, it is well beyond anything we saw during the Clinton administration."
But Xochitl Hinojosa, a spokeswoman for the Justice Department, said there is plenty of precedent for what DOJ is doing.
"Our redlining cases are based on and consistent with cases brought in the Clinton and Bush administrations," she said.
But industry representatives said the Justice investigations contradict the findings of federal regulators, who have given several targeted institutions high grades on Community Reinvestment Act exams.
They argue that Justice is investigating potential cases of discrimination outside a bank's defined CRA assessment area.
"In more recent actions, the DOJ is contending that it can overrule federal regulators in determining the geographic areas that a bank must serve and claims 'redlining' if it believes that a bank should have more branches or make more loans in certain geographic areas, even in areas that are not within a fairly drawn CRA assessment area," Hancock said.
Warren Traiger, who is also at BuckleySandler, said Justice has been concerned banks may simply be defining their CRA assessment areas in a manner that excludes adjacent minority neighborhoods.
"You can't circle an area, which is what redlining means," said Traiger, who represented Midwest. "DOJ described Citizens as having a horseshoe around Detroit. Had its assessment area included the inner city and if marketing had showed the same outreach" to that area as others, "even if they ended up with the same infinitesimal number of loans, the outcome would have been different."
Bernard Clineburg, the chairman of the $2 billion-asset Cardinal Financial Corp. in McLean, said his bank has been told it may receive a formal complaint, even though it received a "satisfactory" CRA grade from the Federal Deposit Insurance Corp. last year.
"We're looking forward to getting that" complaint "and putting the matter to rest. But it's disconcerting that it has sort of stopped us in our tracks. For us, this is a four-year situation," Clineburg said. "There was a first inquiry four years ago. A year ago, once we received a satisfactory rating by the FDIC, we thought it was closed.
"We're a very compliant bank. We've always had an excellent relationship with our regulators and we are completely stunned by the DOJ inquiry. We hope that it is resolved to our satisfaction as soon as possible. I believe if it drags on it could be very damaging to us."
Clineburg indicated the bank would choose a court fight over the types of enforcement actions agreed to by other banks. "As long as we didn't do anything wrong, we would never settle," he added.
Yet Hinojosa said prior cases demonstrate there is nothing new about DOJ looking at areas outside of a bank's assessment area. She said most fair-lending complaints since a landmark 1994 case involving Chevy Chase Bank claimed discrimination resulting from CRA assessment areas that excluded areas in which a majority of the residents were minority. These included cases filed during the Bush administration, she said.
"In many of these cases, the banks had received CRA ratings of satisfactory or higher from their regulators," Hinojosa said.
Still, lawyers contend the escalation in proceedings is taking a toll, and community banks in the department's crosshairs are feeling compelled to settle because of the expenses of fighting DOJ in court.
"We have a client who felt that the cost of defending themselves was higher than the penalty they were going to pay for settling even though did not believe they did anything wrong," said Peter Weinstock, an attorney at Hunton & Williams.
But Hinojosa said it is not just small banks being targeted. She cited the May announcement of a settlement with a Bank of America Corp. mortgage-servicing subsidiary formerly owned by Countrywide Financial Corp., as well as a settlement with a Morgan Stanley subsidiary, both regarding allegations that they improperly foreclosed on military servicemembers without first getting court orders.
Meanwhile, two lending subsidiaries of American International Group Inc. settled for $6 million last year. They allegedly had charged higher fees to African-American borrowers.
"The department takes action against banks based on whether there is evidence of discriminatory lending, and does not consider the size of the bank when making these decisions," Hinojosa said.
Rowe agreed that size is an unlikely predictor of whether a bank will be investigated.
"By no means is the fair-lending enforcement restricted to any sized institution," he said. "They're sharing the love for everyone."
Register or login for access to this item and much more
All Bank Investment Consultant content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access