The Federal Community Reinvestment Act (“CRA”) requires regulated financial institutions to focus on meeting “the credit needs of the local communities in which they are chartered.” See 12 U.S.C. § 2901(a)(3). Under the CRA, each regulated financial institution designates an “assessment area” that describes the geographic boundaries of the bank’s local community. See 12 C.F.R. § 25.41. Federal regulators review that delineation to ensure that it is appropriate, and, among other things, confirm that the proposed assessment area does not reflect illegal discrimination and does not arbitrarily exclude low- or moderate-income geographies. Id. Federal regulators also audit a bank’s effectiveness in meeting the credit needs of that community. See 12 C.F.R. §§ 25.21-25.29.
Hudson City Savings Bank (“Hudson”) is based in Paramus, New Jersey, and the Office of Thrift Supervision (“OTS”), formerly an agency of the Department of the Treasury, performed a series of evaluations of Hudson’s CRA compliance. In 2008, the OTS reviewed the scope of Hudson’s assessment area, and evaluated Hudson’s CRA performance within that assessment area. The OTS found Hudson’s CRA performance to be “Satisfactory,” and further concluded, “No violations of the substantive provisions of the antidiscrimination laws and regulations were identified during the concurrent examination where we evaluated compliance with consumer laws and regulations.”In 2011, based on a new CRA audit, the OTS reached the same conclusions. Specifically, the OTS did not raise any concerns regarding the way in which Hudson’s assessment area was delineated. And the OTS found Hudson’s CRA performance to be “Satisfactory,” and non-discriminatory.
However, on September 24, 2015, the Consumer Financial Protection Bureau (“CFPB”) and Department of Justice (“DOJ”) announced they had reached a settlement with Hudson related to allegations that Hudson engaged in illegal redlining. The Government’s claim concerns Hudson’s residential mortgage lending business from 2009-13, overlapping with the scope of the above-mentioned CRA evaluations. A significant aspect of the Government’s claim is that Hudson allegedly delineated its CRA assessment area in a discriminatory fashion in violation of the Fair Housing Act (“FHA”) and Equal Credit Opportunity Act (“ECOA”). The Government contends that Hudson’s assessment area improperly excluded certain majority-minority areas, and that, as a result, Hudson under-served those areas.
Notably, although Hudson is a New Jersey bank that primarily, but not exclusively, serves communities in New Jersey, several of the majority-minority areas at issue are located in other states. For example, the Government contends that Hudson’s assessment area was discriminatory because it did not include certain boroughs of New York City, specifically the Bronx, Brooklyn, Queens, and Manhattan, and because it did not include the City of Philadelphia. While it may seem odd to suggest that a relatively small, New Jersey-based lender was legally obligated to address the credit needs of neighborhoods in New York or Pennsylvania, that apparently is the position of the CFPB and DOJ in this case – contradicting the posture previously taken by the OTS in its CRA evaluations of Hudson.
Hudson has not conceded any wrongdoing, and has indicated that it is entering into the settlement solely to avoid litigation. Because the parties are settling their dispute, we do not know all the facts of the case. But the Government’s allegations raise several broader issues that are important to the consumer finance industry.
First, it seems that, for purposes of FHA and ECOA investigations, the CFPB and DOJ do not necessarily consider themselves to be bound by determinations previously reached by other federal agencies in connection with CRA audits. Here, the OTS treated Hudson’s CRA assessment area as appropriate, and indicated, in the context of a CRA evaluation, that Hudson’s relevant practices were non-discriminatory. The CFPB and DOJ reached the opposite conclusion through the lens of the FHA and ECOA.
An important, but unresolved, question is whether the Government’s position in this regard is correct from the perspective of the law of estoppel. If a lender wins a lawsuit in court, the lender can use that victory as a shield against a subsequent lawsuit by the same plaintiff regarding the same issue. Analogously, if a federal agency conducts a CRA audit and finds that a lender’s conduct is compliant with federal law, is the CFPB barred from subsequently alleging that the same conduct violates federal law?
Second, setting aside the issue of estoppel, the CFPB’s lawsuit also offers an insight into the CFPB’s stance regarding the scope of the FHA and ECOA. In particular, the CFPB appears to be signaling that, in its view, the FHA and ECOA potentially impose obligations on a lender outside of the state where the lender is based and outside the lender’s CRA assessment area, even in geographies where the lender has never done business. The notion that a lender based in Paramus, New Jersey is legally obligated to do business in New York City or Philadelphia may seem counterintuitive. However, until this issue is tested in court, lenders should keep this point in mind when they conduct fair lending self-assessments.
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