Some lessons from the CFP’s enforcement action against Hudson City Savings Bank 

Introduction

In late September of 2015, the Consumer Financial Protection Bureau (“CFPB”) and the Department of Justice (“DOJ”) announced a significant settlement against Hudson City Savings Bank of New Jersey.  The case involved red-lining and discouraging potential Black and Hispanic borrowers from applying for mortgage loans.  As a smaller institution that concentrates on commercial lending it is easy to dismiss this case as irrelevant to your operations.  However, if you think that something like this can’t happen to you, let’s look at some lessons learned in this case. 

Description of the findings  

In filing its complaint, the CFPB and the DOJ made the following findings;

• In carrying out a program to expand the bank’s branches outside of New Jersey from 2004 through 2010, the bank’s management focused on markets in areas of New York and Connecticut that “form a semi-circle around the four counties in New York with the highest proportions of majority-Black-and-Hispanic neighborhoods.”  It also alleged that during the relevant time period, the bank did not accept first lien mortgage loan applications at all of its branches and referred applicants to one of seven retail loan officers working at branches outside of and not in proximity to majority-Black-and-Hispanic areas.
• The bank generated approximately 80 percent of its mortgage applications through mortgage brokers who were heavily concentrated outside of majority-Black-and-Hispanic areas.
• The bank engaged in limited marketing outside of its branch network that focused on neighborhoods with relatively few Black and Hispanic residents and therefore “failed to advertise meaningfully in majority-Black-and-Hispanic neighborhoods.”
• In delineating its assessment area under the Community Reinvestment Act (CRA), the bank excluded most of the majority-Black-and-Hispanic neighborhoods in the NY/NJ and Camden MSAs.
• During the relevant period, the bank failed to exercise adequate oversight or hire sufficient staff to ensure fair lending compliance and had no written policies or procedures to monitor for compliance.

Again, each of these practices could possibly be dismissed as fairly obvious tactics that “our institution would never employ!”, but we believe that there are several important lessons for all institutions to take away from these findings.  

The results of these findings were very expensive to Hudson City Savings.  Among the things that the institution agreed to do were the following:  

• Pay $25 million to a loan subsidy program: To increase access to affordable credit, the loan subsidy program will offer residents in majority-Black-and-Hispanic neighborhoods in New Jersey, New York, Connecticut, and Pennsylvania mortgage loans on a more affordable basis than otherwise available from Hudson City. The loan subsidies can include interest rate reductions, closing cost assistance, and down payment assistance.[1] 
• Spend $1,000,000 on targeted advertising and outreach: During the five-year term of the order, Hudson City Savings will spend $200,000 annually on a targeted advertising and outreach campaign to generate applications for mortgage loans from qualified residents in the affected majority-Black-and-Hispanic neighborhoods. The bank will be required to display promotional materials in branch offices and advertise via print media, radio, and bilingually in English and Spanish.

• Spend $750,000 on local partnerships: Hudson City will spend $750,000 to partner with community-based or governmental organizations that provide assistance to residents in Black and Hispanic neighborhoods.

• Spend $500,000 on consumer education: During the five-year term of the order, Hudson City will spend $100,000 annually to provide 12 financial education events covering credit counseling, financial literacy, and other topics to help identify and develop qualified loan applicants from the affected Black and Hispanic communities.

• Offer full-service banking in majority-Black-and-Hispanic communities: Hudson City will open two new branches within majority-Black-and-Hispanic neighborhoods. These branches will provide the complete range of services typically offered at Hudson City’s full-service branches.

• Expand assessment areas to include majority-Black-and-Hispanic communities: Hudson City is required to expand its Community Reinvestment Act assessment areas to include all of Bronx, Kings, Queens, and New York counties in New York; the city of Camden; and the city of Philadelphia.

• Assess the credit needs of majority-Black-and-Hispanic communities: Hudson City will also complete an assessment of the credit needs of the majority-Black-and-Hispanic communities within the affected metropolitan areas. The credit-needs assessment will include consideration of how the bank’s lending operations can be expanded to meet the needs of majority-Black-and-Hispanic communities. The bank will meet regularly with representatives of community organizations involved in promoting fair lending, home ownership, or residential development in these communities.

• Develop a fair lending compliance and training plan: The bank will submit a compliance plan that includes a review of its mortgage lending policies and practices, and steps for reducing redlining risk, including an oversight policy to reduce redlining risks among its brokers and a formal ongoing process to monitor for redlining. The bank will also be required to train all of its employees involved in mortgage lending to ensure their activities are nondiscriminatory. Hudson City will also hire a full-time Director of Community Development to oversee the continued development of the bank’s lending in Black and Hispanic neighborhoods.

• Pay a $5.5 million penalty: Hudson City will pay a $5.5 million penalty to the CFPB’s Civil Penalty Fund.

Larger Implications  

Your financial institution would be mistaken to dismiss these findings and the punishment as far-fetched or irrelevant. There are several implications that we believe should be taken from this case. 

Access to credit is an important consideration for your lending portfolio.  The emphasis should be on the access that all parties in your local community have to credit.  This doesn’t mean that you have to make a loan to every person who is a member of a protected class.  It does mean that your credit program should be available to all who qualify.   As the Deputy Attorney General stated

“A lending institution must treat all potential borrowers equally, regardless of their race or the racial composition of their neighborhood, when deciding to offer its loan services. We encourage all lenders to proactively identify responsible lending opportunities that exist in predominantly minority neighborhoods within their lending areas.”[2]

Service Area: the manner in which you determine your service area will be reviewed annually.  You can’t simply say that we won’t conduct activity in a certain area, there has to be a logical business reason for excluding the area.  Today people are more mobile than ever and through technology, banks have the ability to reach customers well beyond political boundaries such as counties.  As a result, it is important to consider your natural constituency when drawing your service area.  

Knowing the Credit needs of Your Community is a key compliance consideration.  Why does your institutions offer the products that it does?  Is there really a need for the products and are you serving a specific need.  This is especially true of the minimum underwriting standards that have been set.  Do they reflect the needs of the community?  For example, if the institution has set a minimum income level of $150k in an area that has a median income of $90k, there may some fair lending considerations.    

Using loan brokers to generate loans carries risks.  The Bank must actively monitor the activities of the brokers and ask questions about the broker’s practices.  The loan applications received should reflect the make-up of your institutions community.  If they don’t, then it is important to ask why.  

Marketing should be inclusive.  There is absolutely no reason to leave out entire communities that are logical potential customers.  It is also important to consider how advertising might impact communities that are traditionally unbanked or under banked.   Advertisement that do not feature people from these communities are often perceived as discouraging. 

Being an exclusively Commercial Lender will not necessarily shield you form similar claims.   Regulation B the Equal Credit Opportunity Act, applies to all loans including commercial loans.  If an institution is perceived as discouraging borrowers from applying for commercial loans a similar claim may follow.  The Community Reinvestment Act also requires institutions to track the number of loans that they have made within their designated communities.  Failure to make significant commercial loans within communities can lead to similar suits.      

Now is a good time to consider the credit needs of your natural community and make sure that you are inclusive.  

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[1] Authors note:  this in no way implies that the Bank is being asked to lower its credit underwriting standards.  The issue is that credit worthy applicants were not given the opportunity to apply.

[2] Assistant Attorney General Vanita Gupta, head of the Civil Rights Division, CFPB announcement