A “Combatting Redlining Initiative” unveiled by U.S. Attorney General Merrick Garland on Oct. 22 emphasizes that banking, mortgage-lending, consumer finance, and housing institutions need to prepare for an unprecedented, coordinated, and focused enforcement effort on fair lending and housing.
The Department of Justice is heralding this new initiative as the “most aggressive and coordinated enforcement effort to address redlining, which is prohibited by the Fair Housing Act and the Equal Credit Opportunity Act.”
And the DOJ is not alone: The Consumer Financial Protection Bureau and Office of the Comptroller of the Currency have joined the initiative. These agencies and DOJ’s Civil Rights Division have pledged to work with state attorneys general to increase “referrals of fair lending violations” and to expand investigations into “potential redlining [by] both depository and non-depository institutions,” including mortgage lenders.
This government-wide effort is the new normal and will include added scrutiny under existing laws, especially as to policies perceived to disproportionately impact racial or ethnic minority groups and women, as well as the use of new tools.
Why This Time Is Different
It would be a mistake to view the current landscape as simply the ebb and flow that occurs in Washington, D.C., when administrations change. This time is different.
First, there is a new climate. Social, economic, and political currents stemming from last year’s social justice movements are providing additional urgency to these enforcement efforts. Especially now that the Centers for Disease Control and Prevention eviction moratorium has expired, congressional pressure and concerns about how Covid-19 impacts communities of color will provide added enforcement momentum.
Second, there is a new team. On Sept. 30, the Senate confirmed Rohit Chopra—former Federal Trade Commissioner—to be the director of the CFPB. Closely aligned with Sen. Elizabeth Warren (D-Mass.) who spearheaded the CFPB, Chopra previously advocated for aggressive Federal Trade Commission enforcement in this space.
Specifically, Chopra called for the FTC to use its unfair practices authority to pursue disparate-impact violations thought to also violate the Equal Credit Opportunity Act (ECOA), a fair lending law enforced by the DOJ, CFPB, and financial regulators.
Chopra takes over for the outgoing acting CFPB director, who is now the nominee for assistant secretary for Fair Housing and Equal Opportunity at the Department of Housing and Urban Development. The new head of DOJ’s Civil Rights Division will lead the initiative, and both she and the number-three official at DOJ to whom she reports hail from the civil rights advocacy community.
Third, there is new coordination by federal authorities. An important driver of DOJ’s fair lending enforcement is the type and quantity of referrals from financial regulators, so it is significant that OCC participated in the redlining announcement and that the new initiative will focus on increasing referrals.
CFPB undoubtedly will play a significant role in the initiative, too—and since President Biden’s inauguration, CFPB has been on personnel hiring spree that has expanded its enforcement capacity.
Now that the president’s team is in place, expect them vigorously to use all the tools at their disposal, including novel applications of existing laws. For example, uses of artificial intelligence, such as algorithms being deployed in lending, mortgage products, hiring, and HR functions are coming under increasing scrutiny.
According to Chopra, who called mortgage and lending algorithms “black boxes behind brick walls,” the CFPB will be “closely watching for digital redlining, disguised through so-called neutral algorithms, that may reinforce the biases that have long existed.”
New Regulations On the Horizon
Regulators also likely will have new tools. Two significant rulemakings are underway that will, if adopted, have major consequences for financial and mortgage lending institutions, as well as others in the housing space.
First, in September, the CFPB published a proposed rule amending Regulation B to implement changes made to ECOA by Sec. 1071 of the Dodd-Frank Act. The proposed rule would require covered financial institutions to collect and annually report data about their small business lending practices, including whether applicants are women-owned or minority-owned.
The CFPB would make this information available online. If a version of the proposed rule is adopted, federal regulators and private litigants will be able to use this lending applicant data, including in class action‑style litigation, like how Home Mortgage Disclosure Act data often facilitates Fair Housing Act matters.
Second, HUD has completed its notice-and-comment period on a proposed rule that, if finalized and upheld by courts, would expand the standards for disparate‑impact liability under the FHA.
This means that any institution engaged in mortgage lending and servicing, or in managing real estate properties, needs to think seriously about how its neutral policies and procedures may be argued to impact minority and other communities protected by the FHA and be prepared to articulate their legitimate business justifications.
No matter how conscientiously financial and other institutions seek to abide by their legal obligations, they can expect to face scrutiny of their practices by regulators, Congress, or private plaintiffs. Taking steps now to proactively address and prepare for such inquiries can help to minimize risk.
Now is the time to evaluate neutral practices and algorithms for unintended impact or biases and ensure there is a legitimate business necessity for them or determine if changes are warranted considering the new enforcement environment.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
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John M. Gore served from 2017‑2019 as acting assistant attorney general and principal deputy assistant attorney general at the DOJ and is now a partner in Jones Day’s Washington, D.C., office.
Alexander V. Maugeri served from 2019‑2021 as deputy assistant attorney general and chief of staff at the DOJ and is now of counsel in Jones Day’s New York office.
The authors previously served as senior officials in DOJ’s Civil Rights Division, which enforces the Equal Credit Opportunity Act and the Fair Housing Act.