Redlining Enforcement

I. Introduction

In recent years, banks have faced an onslaught of lawsuits filed by the United States Department of Justice (DOJ) and other federal agencies for "redlining." Redlining is an invidious practice in which a lender intentionally avoids offering home loans in a neighborhood because of the race or national origin of its residents. The American Bankers Association (ABA) and its members abhor the practice of redlining and member banks strive to offer home loans without regard to race, national origin, or other factors that have no bearing on creditworthiness. However, banks have been targeted by the DOJ's recent anti-redlining campaign for conduct that does not constitute redlining—and in a manner that raises serious legal and constitutional questions.

The DOJ brings redlining cases under the Fair Housing Act and the Equal Credit Opportunity Act, which prohibit discrimination on race or national origin, but do not mention "redlining." Without direction from Congress, the guiding principles and components of unlawful redlining have evolved over the years from federal complaints and consent decrees. Under this approach, redlining is what the DOJ says it is, without any external review by a court. And DOJ's approach is generally copied by other federal agencies as well as state and local enforcement officials.

The DOJ historically maintained that redlining involves intentional discrimination. The Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency, the FDIC and the Federal Reserve Board (collectively, the banking agencies) consistently echoed this view in guidance and examinations. Thus, to establish redlining, the government must prove that the bank acted because of the predominant race or ethnicity of the residents of the neighborhood. The remainder of this paper discusses DOJ's approach, but the comments and criticisms should be understood to also apply to the redlining allegations brought by the banking agencies and the CFPB.

While the DOJ's early redlining cases reflected the understanding that redlining is a claim of intentional discrimination, over the years the DOJ has drifted away from that approach and now brings cases with little, if any, direct evidence of intentional discrimination. Instead, the DOJ has targeted banks for failing to "provide equal access" to home loans in minority areas, relying on a statistical analysis called the "proportional distribution test." That test involves comparing a lender's proportion of loans in minority census tracts to its loans in nonminority census tracts and then comparing that proportion to the average proportion for all lenders in those census tracts. If the target lender's proportional distribution falls below the average of other lenders, the DOJ may charge it with redlining.

Further, the DOJ's more recent cases sometimes appear to rely on a disparate impact theory instead of disparate treatment. These filings have included allegations that a bank's conduct was not justified by a business necessity or legitimate business considerations. The allegations in these complaints, coupled with the government's heavy reliance on statistical analyses with scant attention to the bank's intent, raise concern as to whether the government might be shifting to a disparate impact method of proof without directly acknowledging it.

In any event, the DOJ's use of the proportional distribution test is a stark demand for a racial balance in lending, which is unconstitutional. The premise of the proportional distribution analysis is that all lenders—or at least all satisfying the DOJ and banking agencies' definition of a bank's "peers"—should receive a nearly equal percentage of their applications and originations from minority areas. In other words, the goal is a racial balance of applications and originations across all lenders.

For example, Lender A might originate 100 loans in minority areas and 1000 loans in nonminority areas and thus have a proportional distribution of 9% for minority areas (100 divided by 1100). Lender B might originate 100 loans in minority areas and 500 loans in non-minority areas and thus have a proportional distribution of 17% for minority areas (100 divided by 600). In such circumstances, Lender A might be accused of redlining and Lender B would not, even though their service to the minority areas is identical.

The premise of the proportional distribution test violates the U.S. Constitution and has been rejected as a proper method of enforcement in many areas of civil rights. The U.S. Supreme Court has repeatedly held that "'outright racial balancing' is 'patently unconstitutional.'"

While unlawful, the DOJ's enforcement approach also improperly targets lenders who are doing a good job serving minority areas. That is because the result of the test is driven as much by loan volume in minority areas as it is by loan volume in nonminority areas. Thus, lenders can be accused of redlining simply because they are making a large volume of loans in non-minority areas. Absurdly, a lender could remedy this problem simply by reducing the number of loans it makes in non-minority areas. But that would do nothing to improve access to credit for residents of minority areas.

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