On June 29, the Consumer Financial Protection Bureau (CFPB), the Department of Justice (DOJ), and BancorpSouth Bank (BancorpSouth) agreed to settle allegations of redlining and discrimination in violation of the Equal Credit Opportunity Act and the Fair Housing Act. Notably, this case marks the second instance of the CFPB’s new approach to redlining analysis, which, as we reported, focuses on mortgage loan applications, rather than just originations, and compares a bank to its peers on several metrics, including applications and branch locations. Also noteworthy is the CFPB’s first use of testers or “mystery shoppers” posing as consumers at local branches to support charges of discrimination.
The joint complaint alleges that BancorpSouth illegally redlined majority-minority neighborhoods (census tracts with a more than 50% minority population) in the Memphis Metropolitan Statistical Area (“Memphis MSA”), an eight-county area across Mississippi, Arkansas, and Tennessee in which BancorpSouth generates a significant number of applications. Notably, the redlining allegations against BancorpSouth largely track those against Hudson City Savings Bank (Hudson City), which, as we reported, settled similar charges in late 2015.
Like Hudson City, the CFPB and DOJ alleged that BancorpSouth excluded majority-minority neighborhoods from its Community Reinvestment Act assessment area. The complaint also identified “statistically significant” disparities in mortgage loan applications that BancorpSouth received from minority neighborhoods compared to its peers and the area’s demographics.
For example, tracts in the Memphis MSA are 36.9% high-minority (census tracts with a more than 80% minority population) and 51.6% majority-minority. According to government data, between 2011 and 2013, BancorpSouth received 3.2% of its applications from high-minority neighborhoods and 9% from majority-minority neighborhoods, while its peers generated 17.6% and 27.6% of its applications from these areas, respectively. Meanwhile, BancorpSouth received 91% of its applications from majority-white neighborhoods, which account for 48.4% of Memphis MSA tracts. The complaint alleges that these disparities “cannot be explained by a legitimate, non-discriminatory reason.”
The CFPB and DOJ further emphasized disparities in branch locations and marketing across these areas. BancorpSouth allegedly placed a large majority of branches in the Memphis MSA outside of majority-minority neighborhoods, despite numerous consultants recommending expansion into these areas. And the agencies allege that BancorpSouth “failed to advertise meaningfully” in majority-minority neighborhoods, citing data representing that BancorpSouth sent 90% of its direct mailings to majority-white areas and 5% to high-minority areas during the two-year period.
Underwriting and Pricing
In addition to redlining, the agencies allege that BancorpSouth engaged in discriminatory practices in mortgage loan underwriting and pricing. According to the complaint, while BancorpSouth’s Mortgage Department, which originates loans for sale on the secondary market, makes underwriting and pricing decisions with little to no discretion, the Community Banking Department, which originates loans held by BancorpSouth, had “wide discretion” in underwriting and pricing. The CFPB and DOJ allege that this discretion caused “racial disparities” in approving applications and pricing loans.
For example, government data shows that, from 2011 to 2013, BancorpSouth denied applications for first-lien mortgages from African-American borrowers at a rate of 2.2 times the expected rate if the borrower had been white; the rate rose to 2.9 times for second-lien mortgages. Then, for approved borrowers, the complaint alleges that loan officers charged higher interest rates and origination fees to African-Americans. Overall, the agencies emphasized a lack of adequate controls and monitoring to ensure that loan officers made consistent underwriting and pricing decisions across borrowers and products.
The complaint also alleges that BancorpSouth had a policy of denying minority applicants more quickly and failing to provide credit assistance to “borderline” minority applicants. The government obtained an audio recording from a 2012 internal BancorpSouth meeting in which a manager instructed loan officers that mortgage applications from minorities must be “turned down” in 21 days. Further, despite a general policy that allowed loan officers to assist marginal applicants with improving credit, in the recording, the manager instructs employees to turn down “borderline” minority applicants quickly. According to the government, the recording also documents employees “making derisive comments about minorities.”
Use of Testers Posing as Home Buyers
Finally, the CFPB sent a series of “matched-pair tests” to several BancorpSouth branches. The CFPB sent an African-American tester and a white tester posing as first-time home buyers to the same branch within 10 days. The African-American tester had a “slightly better” financial profile than the white counterpart, such as a higher credit score, higher monthly income, and less debt. The complaint alleges that, on average, loan officers treated African-American testers less favorably than white testers with respect to products offered, cost estimates, real estate agent recommendations, and overall assistance.
Requisite Remedial Actions
Much like the redlining allegations, the remedial actions required by the proposed consent order track those in Hudson City’s case, albeit at a lower cost. BancorpSouth agreed to pay a $3 million civil penalty to the CFPB and nearly $2.8 million in redress to affected consumers. BancorpSouth must also establish a $4 million loan subsidy program to increase access to mortgage loans in majority-minority neighborhoods and extend credit offers to African-American applicants who were denied credit during the relevant time period. In contrast, Hudson City agreed to pay a $5.5 million penalty and invest $25 million in a loan subsidy program.
Additionally, BancorpSouth must spend $300,000 on targeted advertising and outreach to minority areas and $500,000 on partnerships with community-based or governmental organizations that provide financial education and credit repair services. Finally, BancorpSouth must open one additional branch or loan production office in a high-minority neighborhood and implement certain reporting, monitoring, and training policies and practices.
Takeaways For Lenders
In light of Hudson City’s settlement, BancorpSouth’s case is a reminder that the CFPB now focuses its redlining analysis on applications and peer comparisons on several metrics, including branch locations and marketing efforts. Therefore, it remains important for lenders to identify institutions in their peer group and compare performance on the metrics emphasized by the government. Finally, the CFPB’s novel use of testers to support charges of discrimination should prompt lenders to ensure that non-discrimination policies are implemented on the ground at the local-branch level.