In a continuation of enforcement activity related to redlining under October 2021’s Combatting Redlining Initiative, the U.S. Department of Justice (DOJ) announced on May 31, 2023, that ESSA Bank & Trust has agreed to pay $3 million to settle allegations that it engaged in redlining, a discriminatory practice in which lenders fail to provide credit services to individuals living in predominately minority communities. The DOJ’s complaint, filed in the United States District Court for the Eastern District of Pennsylvania, follows a similar settlement announced in July 2022 against Trident Mortgage Company in the same Metropolitan Statistical Area (MSA), and is the seventh redlining settlement since the start of the DOJ’s Combatting Redlining Initiative.
Per the DOJ, the FDIC referred ESSA to the DOJ in 2022 following a routine consumer compliance examination in 2021 that revealed reason to believe that ESSA engaged in redlining in the Philadelphia MSA. The DOJ opened its investigation in August 2022.
In short, the DOJ’s complaint alleges that ESSA Bank failed to provide mortgage lending services to and did not serve the credit needs of majority-Black and Hispanic neighborhoods in the Philadelphia metropolitan area from at least 2017 to 2021. The complaint also alleged that ESSA engaged in a pattern or practice of discrimination by discouraging qualified borrowers from applying for loans and by denying loans to borrowers who lived in majority-Black and Hispanic neighborhoods.
Some particularly important takeaways from the complaint include:
Impact of CRA Assessment Choices
As a depository bank, ESSA is subject to the requirements of the Community Reinvestment Act (CRA) and its enabling regulations, all of which require covered banks to meet the credit needs of the communities they serve. Each bank subject to the CRA self-identifies the communities it serves in the bank’s “assessment areas.” ESSA operated four full-service branches in the Philadelphia MSA, at least two of which (Upper Darby and Lansdowne) were “within miles” of majority-minority neighborhoods in Philadelphia County, Pennsylvania. Yet, despite the proximity of these branches to Philadelphia County, ESSA chose not to include any part of Philadelphia County within its CRA assessment area.
Per the DOJ’s complaint, by not including Philadelphia County, ESSA excluded a county with predominately majority-minority census tracts from its CRA assessment area, and instead, at least 87% of the areas that ESSA chose to include in its assessment area are majority white. Also notable is the fact that ESSA acquired all four of its branches in the Philadelphia MSA in 2015 when it acquired Eagle National Bank. Prior to this acquisition, Eagle National Bank had included all of Philadelphia County in its CRA assessment area.
The FDIC’s July 2021 consumer compliance exam determined that ESSA actually marketed or provided credit, and/or could reasonably be expected to have marketed or provided credit, beyond ESSA’s self-selected CRA assessment area. In particular, the FDIC concluded that ESSA’s actual “lending area” did include, or should have been expected to include, Philadelphia County (amongst other counties in Pennsylvania).
The fact that ESSA defined its CRA assessment area in this manner did not help its optics here. In addition, this definition did not make a significant impact on the end result in the eyes of the DOJ. Per the DOJ’s complaint, the disparity between ESSA’s HMDA-reportable mortgage loans and those of its peer lenders in majority-minority neighborhoods was statistically significant across both the lending area the DOJ thought should reasonably have been served by ESSA and the assessment area that ESSA actually designated under the CRA.
Continuation of Trends
The DOJ’s enforcement actions following the announcement of the Combatting Redlining Initiative in 2021 have seemingly followed similar factual patterns with respect to traditional redlining claims. In particular, the DOJ has appeared to focus on a few discrete types of findings in bringing its recent complaints. These include:
Statistically significant underperformance compared to peer lenders in generating applications and loans in majority-minority neighborhoods in light of available HMDA data
Lack of “brick and mortar” branch offices within majority-minority neighborhoods
Lack of loan officers assigned to serve majority-minority neighborhoods
Lack of oversight over loan officers to ensure outreach was made to majority-minority neighborhoods, and in general, lack of oversight over compliance with redlining laws
Failure to hire and retain loan officers with ties to the majority-minority neighborhoods at issue, including loan officers fluent in languages predominately spoken in these neighborhoods
Lack of advertising and marketing to majority-minority neighborhoods
Here, the allegations against ESSA include similar findings, including:
Failure to adequately staff branches that served majority-minority neighborhoods with enough loan officers to serve the community, and failure to hire any non-white or bilingual loan officers, resulting in discouragement of residents of majority-minority neighborhoods from seeking credit
Lack of marketing and outreach, and failure to advertise meaningfully, in majority-minority neighborhoods to compensate for understaffed branches, resulting in low levels of applications and loans in majority-minority neighborhoods
Intentional targeting of majority-white areas for certain advertisement campaigns related to HELOC products through advertisements only in media outlets targeting majority-white census tracts and suburban areas
Artificially limiting programs designed to expand home ownership opportunities for low- and moderate-income households to its CRA assessment area, thereby excluding majority-minority neighborhoods in Philadelphia County
Failure to take action in light of third-party risk assessments that provided ESSA notice that it was underserving majority-minority communities, including by conducting any remedial outreach or advertising to these communities
Under the terms of the settlement set forth in the proposed Consent Order, ESSA will pay at least $2.92 million in mortgage loan subsidies over a five-year period for majority-Black and Hispanic census tracts in the bank’s lending area. ESSA will also pay $125,000 to fund community partnerships and $250,000 to fund advertising, outreach, consumer financial education, and credit counseling. ESSA will expand its community home buyer program to include majority-minority neighborhoods that had been excluded from its prior iterations of the program. In addition, ESSA will hire two new mortgage loan officers to serve its existing branches in West Philadelphia and will conduct a research-based community credit needs assessment.
The ESSA complaint continues a nearly two-year-old trend concerning DOJ enforcement activities in the fair lending space, as related to traditional redlining. The DOJ’s findings and the terms of this settlement demonstrate the importance for all lenders to monitor their organization’s compliance with fair lending and fair housing laws. In particular, the trends outlined above demonstrate some of the key indicators of redlining in the DOJ’s eyes (many of which mirror those considered by the CFPB and other regulators), and lenders would be wise to conduct their own fair lending risk assessments to understand where improvements may be made in order to improve access to credit for minority communities and to avoid the types of findings made against ESSA.