The U.S. Department of Justice (DOJ) recently commenced a redlining lawsuit against KleinBank, a state-chartered Minnesota bank subject to the regulatory authority of the Federal Deposit Insurance Corporation (FDIC). The complaint, which relates to the bank's residential mortgage lending business, alleges that KleinBank violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) by engaging in a pattern or practice of unlawful redlining of the majority-minority neighborhoods in the Minneapolis-St. Paul metropolitan area. From 2010 to at least 2015, the bank is alleged to have avoided serving the credit needs of individuals seeking residential mortgage loans in majority-minority census tracts in the Metropolitan Statistical Area encompassing Minneapolis and St. Paul (MSA).

The redlining claim is based, in part, upon an allegation that KleinBank established and maintained a discriminatory Community Reinvestment Act (CRA) assessment area that was "horseshoe-shaped," "include[d] the majority white suburbs, and carve[d] out the urban areas of Minneapolis and St. Paul that have higher proportions of minority populations." Specifically, the complaint alleges that the bank's main CRA assessment area excluded 78 of 97 majority-minority census tracks in the MSA, "all but two of which are located in Hennepin and Ramsey Counties." The excluded portion of Hennepin County was alleged to be "an area roughly consistent with the city limits of Minneapolis." The assessment area also allegedly excluded all 37 majority-minority census tracts of Ramsey County.

The DOJ alleged that, in addition to the main CRA assessment area of the bank, the "proper CRA assessment area would include the entirety of Hennepin and Ramsey Counties." Although KleinBank was subject to the regulatory authority of the FDIC, the complaint asserts that "[t]he FDIC has never conducted a redlining examination" of the bank and "has not commented on or approved" its CRA assessment area. We note, however, that the FDIC performed CRA compliance examinations of the bank more than once during the relevant time period and each time it received a satisfactory CRA rating. The DOJ thus appears to be alleging that the FDIC did not critique the bank-designated assessment area in its CRA compliance examinations of the bank.

The DOJ further alleged that all of KleinBank's branches are and have been located in majority-white census tracts and that the residential mortgage loan officers "conduct the bulk of their residential mortgage loan business" at the branch offices. Although the complaint further alleges that "[n]one of the Bank's residential mortgage loan officers maintains offices in majority-minority census tracts," it is the bank that establishes and maintains offices (including loan production offices). Its residential mortgage loan officers presumably are not at liberty to establish offices on their own. Finally, the allegation that the bank had engaged in unlawful "redlining of majority-minority census tracts within the MSA in the provision of its home mortgage lending" also was premised upon factual allegations that the bank:

  • engaged in limited marketing outside of its CRA assessment area, failed to advertise "meaningfully" in majority-minority neighborhoods, and "targeted a portion of its marketing efforts to within a limited radius of its branch locations" that excludes majority-minority neighborhoods;

  • received a lower percentage of residential mortgage loan applications relating to property located in majority-minority neighborhoods, lower than the percentage of such applications received by comparable lenders. The DOJ alleged that, during the period from 2010 to 2015, comparable lenders generated applications in majority-minority census tracts at more than five times the rate of the bank; and

  • made a lower percentage of residential mortgage loans secured by property located in majority-minority neighborhoods, lower than the percentage of such loans made by comparable lenders. The DOJ alleged that, during the period from 2010 to 2015, comparable lenders made loans in majority-minority census tracts at more than four times the rate of the bank.

The DOJ redlining allegations appear to be generally consistent with those made in the recent redlining complaints against Hudson City Savings Bank, BancorpSouth Bank, and, most recently, Union Savings Bank and Guardian Savings Bank.

Unlike recent redlining complaints, however, this complaint commenced a contested litigation. In a statement addressed to its customers and communities, the President and CEO of KleinBank stated that the bank "vigorously disputes" the alleged redlining claim and notes that Minneapolis and St. Paul are "highly competitive markets" that are "comprehensively served by well-established financial institutions with numerous branches and many years of history." The statement further asserts that "the complaint alleges . . . that [the bank] had a proactive duty to expand beyond [its] century-old roots in Carver County and western Minnesota to build branches in Minneapolis and St. Paul, which is a baseless and unprecedented reach by the government." Conversely, the DOJ press release asserts that "[c]ases like this one demonstrate [its] strong commitment to hold banks accountable for continuing and perpetuating historic trends of inequality in residential mortgage lending."

The DOJ's focus on redlining is consistent with the fair lending focus of the Consumer Financial Protection Bureau (CFPB), which recently identified redlining as one of its fair lending priorities for 2017. The CFPB, in the Fall 2016 edition of Supervisory Highlights, lists factors it considers when assessing redlining risk and explains how it performs an analysis of redlining risk, such as its use of Home Mortgage Disclosure Act and census data to assess an institution's lending patterns and its comparison of an institution to peer institutions. These factors, which are described in detail in the Interagency Fair Lending Examination Procedures, include the CRA assessment area and the market area more generally.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit and fair lending laws, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and experience in enforcement actions and transactions.


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