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A bank supervised by the Office of the Comptroller of the Currency (OCC) appealed fair lending violations cited in a recent supervisory letter. The violations were for 42 USC 3604, "Discrimination in the Sale or Rental of Housing and Other Prohibited Practices," and 42 USC 3605, "Discrimination in Residential Real Estate-Related Transactions," and respective regulation, 24 CFR 100, "Discriminatory Conduct Under the Fair Housing Act," (collectively, Fair Housing Act). Specifically, the Supervisory Office (SO) determined the bank engaged in redlining, a form of illegal disparate treatment in which a bank provides unequal access to credit, or unequal terms of credit, because of race, color, national origin, or other prohibited characteristics.
The appeal contended the OCC did not support a Fair Housing Act (FH Act) violation, because the SO did not cite a specific bank policy, practice, or action representing discriminatory intent to redline against residents located in majority non-White or Hispanic census tracts (MNWHCT). The appeal further noted the bank's strategic decisions, branching patterns, and marketing efforts were not indicative of discrimination; the bank had not denied or discouraged loans to qualified minority applicants; and the bank did not offer less favorable credit terms to qualified minority applicants.
The appeal objected to various aspects of the OCC's analytical methods. The appeal asserted the SO disproportionately weighted comparative quantitative analysis and qualitative factors in drawing redlining conclusions. The appeal also stated the SO should have analyzed peer comparative data at the county level rather than at the metropolitan division (MD) level, as each county has unique and significant differences. The appeal contended the SO utilized non-public analytical methods to draw conclusions that led to the violation. Finally, the appeal contended the SO misquoted and misapplied the redlining definition cited in the "Interagency Policy Statement on Discrimination in Lending," noting that the redlining definition is when a bank "refuses" to make loans based on prohibited basis characteristics of residents in the area, as compared to "fails" to make loans based on a prohibited basis.
The Ombudsman conducted a comprehensive review of the information and relied on the following supervisory standards when formulating conclusions:
The Ombudsman agreed with the SO's decision to cite the FH Act violation. The supervisory record confirmed that the bank discriminated on the basis of race, color, national origin, or other prohibited characteristics.
The Ombudsman determined the SO analyzed and considered both statistical and non-statistical data to draw conclusions in support of a redlining finding. Examiners reviewed bank and peer Home Mortgage Disclosure Act (HMDA) data to identify the distribution of loan applications received and loans originated to MNWHCT geographies. The data revealed the bank underperformed to peer groups. The Ombudsman found that examiners followed examination procedures outlined in the "Fair Lending" booklet of the Comptroller's Handbook to consider the factors noted below to conclude the bank engaged in redlining and violated the FH Act.
While discriminatory intent must be present for an FH Act violation to occur, intent need not be overt and can be inferred by the lack of any credible information or explanation that the disparate treatment is nondiscriminatory. Specific bank policy, practice, or action that directly evidence discriminatory intent are examples of overt evidence, which was not the basis for the SO's citation of a FH Act violation in this case. The Ombudsman agreed with the SO's inference of discriminatory intent based on the lack of credible information or explanation that the treatment was nondiscriminatory.
The Ombudsman concluded the bank made strategic decisions that led to an expanded CRA AA without ensuring it provided equal credit access in the new geography regardless of race, color, national origin, or other prohibited characteristics. The bank had a legal responsibility to provide credit services to its entire CRA AA, including to residents of MNWHCTs. The supervisory record showed the bank did not conduct outbound marketing or outreach efforts to non-customers located in MNWHCTs. Instead, the bank focused marketing efforts towards established bank customers. In addition, the bank's closure of branch locations negatively impacted residents in or near MNWHCTs to a proportionally greater degree than residents in non-MNWHCTs. These branch closures unequally reduced the availability of credit services to MNWHCT residents. The bank's CRA AA also did not conform to 12 CFR 25.41(c)(1), which states CRA AAs should be composed of one or more metropolitan statistical areas (MSA), MDs, or contiguous political subdivisions, such as counties, cities, or towns. The bank's CRA AA excluded a majority of MNWHCTs within a particular county, an indicator of discriminatory redlining. In totality, the absence of marketing and outreach to MNWHCT residents, branch closures in and near MNWHCTs, and a CRA AA that excluded MNWHCTs, led to the Ombudsman's agreement with the SO's conclusion of redlining and thereby the FH Act violation.
The Ombudsman concluded that a review of the bank's underwriting was not required to cite the FH Act violation because the fair lending examination was focused only on redlining. Examiners conduct a comparative file review when focal points identified in the fair lending screening process suggest completing an analysis of the bank's underwriting to review denial rates and underwriting disparities among prohibited and non-prohibited basis groups.
The Ombudsman concurred with the SO's method to analyze statistical data at the MD level to draw redlining conclusions. The bank did not demonstrate unique and significant differences were present between the counties that make up the MD. The dissimilar factors the appeal identified were overshadowed by the more meaningful similarities the counties share. "Interagency Fair Lending Examination Procedures" provides an example of how smaller geographical groupings for analytical purposes can mask discriminatory lending practices. If the counties within the MD were analyzed in isolation, as the appeal suggested, it would potentially disguise redlining that is apparent when the bank's mortgage lending activity within the MD is viewed in totality.
The Administrative Procedure Act (APA) governs the process by which federal agencies develop and issue regulations and includes public notice and comment requirements for rulemakings. The Ombudsman concluded that the OCC's screening process is not a rulemaking subject to the APA. The "Bank Supervision Process" (2019) and "Fair Lending" (2010) booklets of the Comptroller's Handbook discuss how the OCC annually identifies banks at risk for potential fair lending violations using a screening process that analyzes HMDA data. The "Fair Lending" booklet of the Comptroller's Handbook describes how the OCC overlays bank and peer group HMDA data with geographic and demographic information to identify potential redlining.
The Ombudsman agreed with the SO's interpretation and use of the redlining definition cited in the "Interagency Policy Statement on Discrimination in Lending." While the policy statement states, "A lender may not, because of a prohibited factor… Refuse to extend credit or use different standards in determining whether to extend credit," this does not accurately capture the totality of the factors or conduct the OCC considers when determining whether a bank has discriminated. The policy statement also states, "A lender may not, because of a prohibited factor… Fail to provide information or services or provide different information or services regarding any aspect of the lending process, including credit availability, application procedures, or lending standards," thereby using the word "fail" in a broad context. The federal agencies responsible for administering the FH Act have used various phrasing to describe the conduct that constitutes redlining, and all descriptions focus on lenders treating geographic areas differently based on the prohibited basis characteristics of residents in a particular area. In this case, the Ombudsman agreed with the SO that the supervisory record adequately established that the bank engaged in conduct that would constitute redlining.