Consumer Financial Protection Bureau Takes First-Ever Agency Redlining Action Against Nonbank Lender

On July 15, the Consumer Financial Protection Bureau filed a complaint against a Chicago-based nonbank mortgage company alleging fair lending violations predicated, in part, on statements made by the company’s owner and other employees during radio shows and podcasts from 2014 through 2017. The complaint, filed in federal court in Illinois, marks the first instance in which a federal regulator has taken a public enforcement action against a nondepository institution based on allegations of redlining.  

According to the CFPB, the mortgage company violated the Equal Credit Opportunity Act and the Consumer Financial Protection Act by engaging in discriminatory marketing and applicant outreach practices that allegedly:

• Discouraged African Americans from applying for mortgage loans from the company
   
• Redlined African American neighborhoods in the Chicago area by (i) discouraging their residents from applying for mortgage loans from the company, and (ii) discouraging nonresidents from applying for loans from the company for homes in these neighborhoods.

At the heart of the complaint are a number of racially disparaging comments allegedly made by the owner and employees on the company’s broadcasts. The CFPB also bases its allegations on the company’s comparatively low application volume from African American neighborhoods and applicants, its lack of specific marketing targeting the African American community in Chicago, and its failure to employ African American mortgage loan officers.

Redlining cases historically have been brought against depository institutions, which may place more focus on the physical location of branches, and are obligated to establish an assessment area under the Community Reinvestment Act. Specifically, the CRA requires each depository to delineate its “Assessment Area(s)” based on its physical locations, and the inclusiveness of that delineation and the extent of lending provided to majority-minority neighborhoods therein can form a basis for redlining reviews. In recent years, regulators also have developed a novel concept, undefined in any law or regulation, called a “Reasonably Expected Market Area” (REMA) that they use to assess whether a bank is serving areas outside their physical footprint, but nevertheless an area in which they should be conducting business. By untethering the redlining analysis from the CRA paradigm, regulators have paved the way for the CFPB to pursue these cases outside of the banking arena against nonbank lenders, which originate the majority of mortgage loans.

The complaint also shows what nonbanks may expect from a CFPB redlining analysis, including:

• Identification of a quasi-REMA, based on the metropolitan statistical area(s) (MSA) from which a company receives most of its business (the company drew over 90% of its applications for properties in the Chicago MSA)
   
• Mapping of applications received and loans actually originated by property address within the MSA to show the apparent exclusion of majority-minority census tracts
   
• Comparison of applications received and loans actually originated by a company to those of other lenders (“peers”) in the market with respect to minority borrowers and majority-minority neighborhoods
   
• Review of whether, and to what extent, a company hires protected class members
   
• Evaluation of a company’s targeted marketing efforts toward minority populations.

For example, in the complaint, the CFPB alleges there are statistically significant disparities in the company’s applications drawn from majority African American neighborhoods in the Chicago MSA, as compared to its peers, to form the basis for its redlining claim. The complaint also includes a map of applications by property address showing that applications submitted to the company were almost exclusively drawn from majority-majority census tracts. The CFPB additionally notes that despite African Americans making up 30% of Chicago’s population, the company “made no effort to market directly to African-Americans” and failed to hire a single African American loan officer (out of 17 loan officers employed from 2014 through 2017), despite being aware that doing so could have increased the number of applications from African Americans.

The complaint demands injunctive relief, damages, and restitution under ECOA and the CFPA, and a civil money penalty under the CFPA.

If you have any questions regarding the complaint or its ramifications, please contact an Orrick attorney with whom you have worked in the past.