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The CFPB and the Department of Justice have partnered together to enter into a proposed consent order with BancorpSouth Bank regarding allegations the bank engaged in a practice of redlining in its mortgage lending practice, including discrimination in its underwriting and pricing of individual mortgage loans to minorities, and implementing an explicitly discriminatory denial practice. The investigation marks the first time that the CFPB has used testers or “mystery shoppers” to support an allegation of discrimination. The consent order, if approved, requires the bank to invest $4 million in loan subsidies, pay $2.78 million in settlement to African-American consumers harmed by the bank’s practices, spend at least $300,000 on targeted advertising in majority-minority neighborhoods in its Memphis MSA, spend at least $500,000 on local partnerships with community or governmental organizations that provide financial literacy and pay a $3 million civil penalty. The proposed consent order also requires the bank to extend credit offers to previously denied African-American consumers who were denied mortgage loans as a result of the bank’s allegedly discriminatory underwriting policies and add at least one additional branch in a majority-minority neighborhood in its Memphis MSA.
The complaint alleges that between 2011 and 2013, the bank violated the Equal Credit Opportunity Act and Fair Housing Act. Both Acts prohibit discrimination based upon race, color, and national origin. The agencies alleged that the bank “discriminated in distinct ways through virtually every stage of its lending process.” Complaint, at ¶ 3. The complaint makes four key allegations against the bank. First, the complaint alleges that the bank engaged in redlining in minority neighborhoods in its Memphis MSA. Id. at ¶4. Secondly, the complaint alleges that the bank illegally discriminated against African-American mortgage applicants in its loan underwriting, rejecting both consumer and business purpose loans at significantly higher rates than those of “similarly situated non-Hispanic White applicants” (“White”). Id. at ¶5. Thirdly, the complaint alleges the bank discriminated against African-American applicants, charging higher prices than similarly situated White applicants. Id. at ¶6. Finally, the complaint alleges that the bank implemented a policy and practice that required its employees to treat mortgage applicants differently based upon their race. Id. at ¶7.
The bank, while neither admitting nor denying the allegations of the complaint, entered into the consent order “solely for the purpose of avoiding contested litigation with the United States and the Bureau, and to instead devote its resources to providing fair credit services to eligible borrowers with meeting their credit needs.” The consent order further notes that before the entry of the Order, the Bank engaged in steps to improve its compliance management system, including:
**With the assistance of a third party independent compliance-management-system consultant, develop and submit for approval a written Fair Lending Compliance Plan that includes at a minimum:
**Implement policies and procedures for achieving complete objectivity in the pricing of all mortgage loans based on credit and borrower characteristics supported by legitimate business needs;
**Maintain specific race-neutral underwriting guidelines, policies, and procedures for mortgage loans that are designed to ensure consistent application of legitimate underwriting criteria and avoid unlawful discrimination.
Banks and other lenders should take notice that the CFPB has now embraced the use of “testers” or mystery shoppers – sending individuals (both white and African American) into branch offices to ascertain whether testers experience different treatment. The CFPB contended in this matter that, in several instances, a Bancorp South Bank loan officer treated the African-American tester less favorably than a white counterpart with similar credit qualifications.
Caren Enloe is a partner who concentrates her practice in consumer financial services litigation and compliance, bankruptcy, and commercial litigation with an emphasis on creditor’s rights. She has a deep understanding of the complex compliance environment surrounding the financial services industry and regularly advises financial service companies on licensing and compliance issues involving state and federal consumer protection and finance statutes. Caren is the author of a daily blog titled: Consumer Financial Services Litigation and Compliance where she posts timely and informative updates regarding the CFPB, FTC, and a host of topical litigation issues involving consumer protection law....LEARN MORE