Redlining is a credit union problem, too. That’s the clear message the Department of Justice sent this month in its first-ever redlining settlement with a credit union.
A $5.8 billion-asset credit union agreed to pay more than $6.5 million to settle claims that from at least 2017 through 2021, the credit union redlined majority-Black and Hispanic neighborhoods in and around Philadelphia by not providing mortgage lending services and discouraging those living in these neighborhoods from applying for mortgages. The DOJ says there was “a pattern or practice of lending discrimination” and that the credit union violated both the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA).
The evidence was in the analytics. Its peers generated almost three times as many applications and originated three times more home loans, the DOJ says.
Part of the problem, according to the DOJ, was that all but one of the credit union’s branches were in majority-White neighborhoods. It had no branches in Philadelphia County even though it makes up 34% of the credit union’s market area and the credit union describes the city as the “hub” of its operations. More than 75% of the market area’s majority-Black and Hispanic neighborhoods are in Philadelphia.
What caused the fair lending violation?
In 2009, the credit union told NCUA that it was going to open three branches in Philadelphia County and implement a community outreach plan for underserved residents. It never happened. Instead, it expanded into majority-White neighborhoods, the DOJ says.
In 2016, the credit union hired a third party to assess its fair lending risk and found out it had far fewer applications from minority borrowers than its peers. The DOJ says the credit union didn’t do anything to address the finding.
The DOJ says these actions created inequal access and discouraged potential applicants for home loans in these areas on the basis of race, color, or national origin and that there was no legitimate business reason or necessity for them.
What does the redlining settlement mean for future credit union fair lending enforcement?
The DOJ describes the credit union settlement as a “landmark agreement” and a “historic achievement for the Combating Redlining Initiative.”
“This redlining settlement marks the Justice Department’s very first resolution involving a credit union, making clear our intent to hold all types of lenders accountable for their role in modern-day redlining,” said Assistant Attorney General Kristen Clarke of the Justice Department’s Civil Rights Division in a press release. “There are well over 4,600 credit unions across America, all subject to federal laws that prohibit redlining and lending discrimination.”
It likely won’t be the last. The case began with a referral to the Justice Department from the National Credit Union Administration (NCUA). The NCUA has more than doubled its annual fair lending compliance exams in recent years, NCUA Chair Todd M. Harper said in a statement responding to the DOJ settlement, reminding credit union that the NCUA “regularly continues to refer credit unions to the U.S. Department of Justice when the agency identifies patterns or practices of discrimination.” The NCUA sent six ECOA matters to the DOJ in 2023, according to the Fair Lending Report of the Consumer Financial Protection Bureau published in June 2024. Harper said that so far in 2003 and 2004, those referrals impacted more than 75,000 consumers.
How will the credit union resolve its fair lending issues?
The credit union will need to invest $6.52 million in creating more credit opportunities for Philadelphia’s majority-Black and Hispanic neighborhoods, including a $6 million loan subsidy fund for mortgage, home improvement, and refinance loans, $250,000 on community partnerships, and $270,000 on advertising and education.
It must open three branches and hire a community lending officer responsible for overseeing loan development in these communities.
The credit union is also evaluating its fair lending compliance management systems (Fair Lending CMS), training staff, and working with independent consultants to enhance its fair lending program.
Interactive Download: 5 Questions to Rate Your Credit Union’s Fair Lending Compliance Program
Lessons learned from the credit union fair lending settlement
There are many lessons and takeaways for credit unions after this fair lending settlement.
Lesson: Credit unions can get in trouble for fair lending failures
There’s long been a myth that credit unions don’t ever violate fair lending laws because they exist to serve their members. The truth is that most fair lending violations are unintentional. Too often credit unions don’t think about how marketing, branch locations, policies or procedures, loan exceptions, and other seemingly harmless activities might contribute to a fair lending issue. These actions aren’t deliberately intended to discriminate, but accidental discrimination is still discrimination – and against the law.
Related: Credit Union Fair Lending: The Most Common Mistakes & Violations
Lesson: Analyze your fair lending data – and do something about it if you uncover a problem
Analyzing your credit union’s fair lending data is a smart move. It’s the only way to uncover hidden fair lending issues. Once you have information indicating you might have a fair lending problem, you need to address it. Maybe you investigate and find there is a valid business reason for your approach. Maybe you find out that you need to do something more or different to help consumers in your market area. Figure out what that something is and then do it. Fair lending analysis is valuable when you leverage the results.
Lesson: Don’t ignore known risks
The credit union knew since at least 2016 that it wasn’t adequately serving minority home mortgage borrowers, but it didn’t take any action to remediate the problem. Risk management doesn’t stop at identifying a risk. You need to mitigate that risk, monitor it to ensure it’s been adequately addressed, and communicate the results – especially when it’s an area of great regulatory scrutiny.
Lesson: Follow up with promises to regulators
If examiners or your regulator tell you to do something – or you promise them you will do something – do it. Fair lending wasn’t in the spotlight near as much in 2009 when the credit union promised to open branches in majority-Black and Hispanic neighborhoods. Today, the spotlight is hot and bright. Don’t expect much leeway or forgiveness if you aren’t living up to expectations.
Now is the time for credit unions to start assessing and addressing their fair lending risk if they haven’t already done so. Assuming fair lending risk isn’t a problem is a risky decision.
Not sure where to begin? Ncontracts is here to help you understand your fair lending risk.
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