first settlement with non-bank lender illustrates DOJ’s commitment to its ‘anti-redlining initiative’ | K&L Gates LLP

The US Department of Justice (DOJ) is following through on promises to take aggressive action against what it describes as “modern highlighting”.1 Together with the Consumer Financial Protection Bureau (CFPB), on July 27, 2022, the DOJ announced the federal government’s first legal action and settlement with a non-bank mortgage lender to resolve allegations that Trident Mortgage Company (Trident ) allegedly avoided providing mortgage services to minority communities in the Philadelphia, Pennsylvania area. The attorneys general of Pennsylvania, New Jersey and Delaware also participated in the investigation and won settlements.

Everyone in the mortgage industry should take heed: redlining remains a top enforcement priority, and assessing your institution’s redlining risk profile should be a top compliance priority. . Open questions persist, but scrutinizing the Trident Complaint and Consent Order is an essential first step toward understanding the DOJ’s methodology for building a redlining case against a nonbank lender.

Geographic scope

The geographic area in which a lender’s performance will be measured is a threshold issue for a redlining review, which compares an institution’s credit offering in racially different areas. Historically, defendants redlining in government enforcement actions have been deposit-taking institutions subject to the Community Reinvestment Act (CRA), which requires banks to delineate an “assessment area” and then help meet the needs of credit of all segments of communities in this self-defined. geography. However, since non-banks are not covered by the CRA, they are not required to define “assessment areas”. Trident’s complaint provides guidance to non-banks regarding the DOJ’s and CFPB’s views on this issue, stating that it assessed the lender’s “self-defined lending footprint” or “market area”, which allegedly consisted of “the entire Philadelphia MSA”. .” Trident reportedly “got 80% of its mortgage applications” in the Philadelphia Metropolitan Statistical Area (MSA), signaling that regulators may also consider a non-bank’s overall lending volume to determine geography. In our experience, lenders often have policies, strategic plans, or other formal or informal documents that describe a “footprint” or “market area,” and compliance teams should carefully review the accuracy of these statements.

Minority communities

In regards to Trident, the DOJ and CFPB defined underlined “minority” communities as those where 50% or more of the population “identify as Black, Hispanic, Asian, Native American, Hawaiian, or Pacific Islander in the census. American”. Other DOJ redlining regulations over the past year have defined “minority communities” more narrowly, focusing on extending credit to majority black and Hispanic areas. The definition of “minority communities” used in the Trident lawsuit may reflect the melting pot nature of the Philadelphia MSA, which the complaint describes as 20% African American, 10% Hispanic, 6% Asian and 61% non-Hispanic white. To accurately assess the risk of redlining, institutions need to be aware of the unique demographic makeup of the areas in which they operate and tailor their analyzes accordingly.

Peer lenders

Redlining assessments typically involve comparing the relative performance of a lender serving minority communities to the performance of other lenders, but which other lenders are appropriate for comparison? Identifying an institution’s “peers” can be one of the most difficult aspects of a redlining analysis. In a recent redlining settlement against a traditional bank, the DOJ defined “peer lenders” as “similarly situated financial institutions that received between 50% and 200% of the Bank’s annual mortgage application volume.” Trident’s complaint, on the other hand, does not define the group of lenders that the DOJ has identified as the non-bank’s “peers,” although it is possible to reverse-engineer the peer group on the basis of the alleged loan statistics.

Importantly, the complaint alleges that Trident received reports from third-party vendors showing that its volume in minority neighborhoods was low compared to the performance of its peers. To the extent that an institution outsources fair lending analyzes to third-party vendors or conducts analyzes in-house, compliance officers should review the peer groups used in these reviews, as they may be difficult to challenge later. In addition, if the analyzes show room for improvement, it is essential to properly raise the issue with management and develop an action plan for penetrating the minority market.

Physical locations and loan officers

Trident’s business model involved renting office space from an affiliated real estate company. The DOJ and CFPB alleged that Trident had a physical presence in 53 offices, but 51 were located in white areas and only two were located in minority communities. Additionally, Trident’s loan officers were assigned to offices in white areas, 64 of its 68 loan officers were white, and Trident reportedly generated business and hired new loan officers based on referrals from its existing, mostly white, loan officers.

When assessing an institution’s level of risk, Trident’s complaint confirms the importance of considering the physical location of loan offices and loan officers, as well as the racial makeup of the sales force. an institution and its ability to generate business in all segments of the communities in which the company operates. Of course, the trend of online mortgages continues to be seen industry-wide, and the importance of the issue of physical presence will depend on the business model of the institution.

Marketing to Minority Populations

The DOJ and CFPB alleged that the patterns in Trident’s marketing materials appeared to be white, and that a third-party vendor hired by Trident had developed marketing materials that focused only on majority white areas. Lenders developing marketing campaigns should ensure that materials do not indicate an inadmissible preference and should carefully monitor any third-party marketing vendor to confirm that campaigns are appropriately designed to reach all segments of the community, including minority and non-minority areas.

Flagrant emails

The facts alleged by the DOJ and CFPB — which Trident denied in the lawsuit resolution — include emails allegedly received and distributed by Trident employees containing language the government considered racial slurs and evidence of discrimination. evident in mortgage lending. Compliance officers should be aware that investigations of unlawful discrimination may now be more likely to involve reviews of electronically stored email communications, which can be costly and time-consuming. Regular employee training on Fair Lending compliance and company policies regarding the use of email is essential.

The Trident lawsuit and settlement is the major redlining enforcement action against a non-bank lender, representing a seismic shift in the historical approach to redlining issues. Banks and non-banks should take a proactive approach to assessing current (and historical) fair lending risks and ensuring adequate internal fair lending controls to mitigate any potential claims of redlining.

1 In October 2021, K&L Gates previously discussed the DOJ’s “Combatting Redlining Initiative” and key takeaways for institutions from the DOJ’s announcement. See Banks and Non-Banks Beware: New Types of Redlining Claims Are on the Horizon (https://www.klgates.com/Banks-and-Non-Banks-Beware-New-Types-of-Redlining -Claims-are-on-the-Horizon-10-26-2021) (Oct. 26, 2021).

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