CFPB and DOJ Settle Redlining Claims against Large Nonbank Mortgage Company

On October 15, 2024, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) announced a fair lending settlement with a large nonbank mortgage company, Fairway Independent Mortgage Corporation (“Company”).  The settlement resolves allegations that the Company discouraged Black consumers from applying for credit in the Birmingham, Alabama area from 2018 to 2022 in violation of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).  The CFPB and DOJ alleged that the Company predominantly directed its marketing in the Birmingham area to majority-white neighborhoods, effectively redlining majority-Black neighborhoods.  This is the second CFPB and DOJ redlining settlement with a large nonbank mortgage company since the DOJ announced its Combatting Redlining Initiative.

The settlement requires the Company to pay a $1.9 million civil money penalty, and provide the following to majority-Black neighborhoods in the Birmingham area:

·      a $7 million loan subsidy program,

·      open one new loan production or retail office,

·      spend at least $500,000 on advertising,

·      spend at least $250,000 on consumer financial education, and

·      spend at least $250,000 on community development partnerships.

As is typical in these types of settlements, the government relied on Home Mortgage Disclosure Act (HMDA) data. The government alleged that the Company’s percentage of applications between 2018 to 2022 from majority-Black neighborhoods in the Birmingham area was statistically significantly below the average of the Company’s peers, with the peers generating applications at over three times the rate of the Company.  Per the government’s allegations, the disparity in application rates was even higher for high-Black neighborhoods, with the Company’s peers generating applications at over eight times the rate of the Company.  The government alleged that the Company “had no legitimate, nondiscriminatory reason to draw so few applications from these areas.”  The government also alleged that the Company originated mortgage loans from majority-Black areas in the Birmingham area at a statistically significant lower rate than the average of its peers during the 2018 to 2022 period. 

As is also typical in these redlining cases, the government also relied on other facts about the Company’s marketing to support its redlining case.  The marketing facts the agencies alleged include (note that the following facts are only alleged, and the Company neither admits nor denies the government’s allegations by settling):

Office Locations.  The Company had three retail offices and three loan production desks in real estate offices in the Birmingham area during the time period in question, none of which were in majority-Black neighborhoods.  Additionally, the Company’s advertising signs were not located in majority-Black neighborhoods, and its advertising materials and websites during the relevant period identified its Birmingham-area office locations, with one website prominently displaying a map that identified the Company’s main office in a majority-white area.  Overall, the Company failed to take action to compensate for its lack of a retail presence in majority-Black neighborhoods in Birmingham.

Loan Officers and Referral Sources.  The Company’s loan officers in Birmingham all worked out of the Company’s retail offices in the area.  In addition, the loan officers were hired based on their relationships with two of the Birmingham branch’s officers, both of whom were white.  The vast majority of the Company’s referrals came from sources in majority-white areas, and the Company lacked a strategy for hiring loan officers with referral sources in majority-Black areas.  The government further alleged that the Company failed to monitor whether its referral sources were leading to referrals that excluded majority-Black areas in Birmingham. 

Marketing.  The Company’s marketing materials depicted its employees in the Birmingham area, “nearly all of whom were white and none of whom were Black.”  The government stated that out of 565 advertisements in Birmingham during the period in question, only 11% of the advertisements with images of a person contained an image of a person who appears to be Black.  In addition, the government stated that out of 15,000 direct mailings in the area during the time period with an image of a person, only about 150 contained an image of someone “who appeared to be other than white.”  Moreover, the Company allegedly only sent 3% of its direct mailings in the Birmingham area to majority-Black areas, and specifically directed dozens of other types of marketing to majority-white zip codes.  The Company also directed significant amounts of advertising to a “country club, an annual charity event, a fitness center, middle school, and a religious college.” 

Marketing Services Agreements.  Of particular note is that the government specifically called out the Company’s marketing services agreements (MSAs).  In 2018 and 2019, the Company’s largest marketing expenditure in Birmingham were two MSAs with two real estate brokerages, under which the real estate brokerages would display the Company’s advertising at their listings and offices, on their websites, and in direct mailings.  Both brokerages were located in majority-white areas in Birmingham, and that for one of the brokerages that provided reports of the listings where the Company’s advertising was displayed, the vast majority of the addresses were in majority-White areas.  The Company allegedly took no action to ensure that either real estate brokerage displayed its advertising in majority-Black areas.    

Internal Monitoring and No Corrective Action.  The government noted that the Company conducted reviews to evaluate its redlining risk, which should have put the Company on notice of its failures in Birmingham, but the Company failed to meaningfully address the risks.

Emails.  As has also become typical in redlining settlements, the government also investigated the Company’s internal emails between employees.  Three email chains, which the government notes were all between white employees, used derogatory language regarding majority-Black areas in Birmingham and indicated a “culture consistent with discrimination.”  In one May 2020 email chain between a loan officer and a loan processor, the loan officer referred to a Birmingham neighborhood as the “ghetto.”  In an April 2018 email chain, a closer emailed a loan officer referring to another Birmingham neighborhood as the “ghetto.”  In a 2018 email chain between two loan officers, one of the loan officers referred to an applicant’s friends as “thug friends,” and said the Company does not “need him as a client.  He is a liability waiting to happen.”  The loan officer then wrote, “I referred him to a Realtor in [T]russville [. . .] he showed up drunk with 4 of his thug friends and showed [h]is ass.”  The government noted that data showed the applicant referred to in the email was Black. 

As you can see, fair lending risk is still present.  The CFPB and DOJ are still investigating and seeking out redlining enforcement actions against both banks and nonbank mortgage companies.  There may actually be a push by the government to bring new enforcement actions and begin new investigations and examinations in the fair lending area, including for redlining, before a potential change in the White House and leadership at the CFPB and DOJ.

Also, of particular note is that the government called out the Company’s MSAs, using them to support its redlining claims. The government even used the brokerage’s reporting under the MSA about where it placed the Company’s advertising as evidence of redlining. This shows that MSAs are another area of redlining risk, which may have be under the radar with many mortgage companies. Mortgage companies should think about their advertising holistically when assessing fair lending risk, including their MSAs, even if the actual advertising conducted as part of the MSAs may not be their focus when entering into those agreements. It may be prudent to conduct a targeted fair lending review of such agreements and amend them appropriately to mitigate any redlining risk.

On that point, given that fair lending risk is still present and may actually ramp up over the new few months, it may be prudent to conduct a fair lending review to identify your company’s risks.  As a reminder, the government’s investigations and examinations (and ultimately, enforcement actions) do include internal emails, so it may be prudent to include reviews of internal emails in any fair lending reviews conducted, and take appropriate action if any potentially discriminatory emails are identified.  Finally, conducting such fair lending reviews through counsel may be prudent, because it enables companies to take advantage of attorney-client privilege to the greatest extent possible, as the government has typically used such internal reviews to support its redlining claims.

You can find the government’s press releases here and here.

If you would like to discuss the issues in this blog post, or would like to discuss fair lending generally, please email me at rich@garrishorn.com.