A group of seasoned bankers and private equity investors in Texas spotted an opportunity as the economy collapsed ten years ago. They raised $ 1 billion, bought shackled lenders, and called their new bank Cadence.
But in 2017, its 13 branches across Houston were only in predominantly white neighborhoods, according to a Justice Department lawsuit accusing the firm in August of redlining. The bank quickly settled $ 8.5 million as executives finalized their next deal: a $ 2.8 billion sale to BancorpSouth.
A crackdown on redlining is coming – and at a particularly difficult time for the financial sector. Not only is public awareness of racial inequality increased, but bankers are also pressuring government officials to approve mergers and acquisitions in one of the fastest clips since the 2008 financial crisis. To have their salaries tied to these agreements, more executives may feel pressure to resolve government grievances.
“Banks are likely to settle down to clear a path,” said Richard Horn, former senior counsel for the Consumer Financial Protection Bureau. “If they’re looking to get approval from their banking regulator for a particular activity – a merger or whatever – it’s not good to have fair loan claims on hold.”
Unlike a century ago, redlining is no longer the story of racist cards drawn by federal authorities that prevented minorities from obtaining mortgages. These are financial executives who pursue mortgage business in white communities while neglecting nearby black and Hispanic residents.
Last year, the bureau filed a lawsuit against one of Horn’s clients, Townstone Financial, which the mortgage broker is fighting.
But Cadence executives came to a different decision. Their settlement is part of a trend in recent years for lenders to close redlining investigations as they close deals.
“Following the acquisition of a Houston-based bank in mid-2012, we found that the mortgage program was not where we wanted it to be,” said Paul B. Murphy , Jr., who runs Cadence Bancorp. After making improvements, “The percentage of our Houston residential mortgages in minority neighborhoods has reached 50% or more, surpassing our peers. We are satisfied with our results today. “
In September 2015, the Hudson City Savings Bank agreed to pay $ 27 million after the Consumer Financial Protection Bureau and the Department of Justice accused the lender of avoiding New York’s most black and Hispanic neighborhoods. Its branches, loan officers, mortgage brokers and marketing efforts have bypassed these areas by essentially pursuing business in a semi-circle around neighborhoods, the government said. A few weeks later, when M&T Bank Corp. finalized the acquisition of Hudson City, a statement by executives completely ignored the lawsuit and instead pledged to continue “the same character and culture of integrity and customer service.”
Andre Perry, a senior researcher who studies breed at the Brookings Metropolitan Policy Program, has identified a way for lenders to avoid redlining regulations. “It’s through inclusion,” he said. “You will avoid the protests, you will avoid the pain.”
Even so, the sum of $ 27 million is not a major burden on much of the financial industry. Key Hudson City executives were collectively to receive significantly more – between $ 3.7 million and $ 20.1 million each – as part of the takeover, according to a proposal sent to shareholders.
Something unusual seemed to happen when the Justice Department sued KleinBank in early 2017 for redlining in Minnesota: The lender hit back. He asked a judge to dismiss the complaint because “the Department of Justice does not have the power to order a small community bank to expand throughout a large metropolitan area that it never has. served or sought to serve “.
The lender settled a year later, weeks before the announcement of a merger with Old National Bancorp of Indiana that touted Klein’s “strong community involvement.” In October, a lawsuit by the nonprofit Fair Housing Center in central Indiana accused Old National of avoiding black mortgage borrowers.
Old National announced a merger of equals with First Midwest Bancorp in June. A spokesperson for Old National said the lender “strongly and categorically denies the allegations” but could not comment further on the pending litigation.
The biggest fair housing deals predate Donald Trump’s time in the White House. The Bank of America Corp. in 2011 and Wells Fargo & Co.’s $ 175 million deal a year later settled accusations that black and Hispanic borrowers were referred to subprime loans – a practice academics sometimes call redirection. reversed.
When regulators announced Trustmark National Bank had settled redlining charges in Memphis on Friday, Attorney General Merrick Garland said he expected more cases like this. Other officials said the scan could also target the use of algorithms that violate fair housing laws.
“There’s this story that things have gotten better, we’ve made so much ‘progress’ and it really isn’t,” said Elizabeth Korver-Glenn, who wrote ‘Race Brokers’ and made housing segregation research at the University of New Mexico. . Even though the modern redline looks different from its predecessor a century ago, she said, the system remains tilted.
Sometimes banks accept settlements before making acquisitions, not just before they are acquired. In June 2019, First Merchants settled a Justice Department lawsuit that accused the lender of avoiding black neighborhoods in Indianapolis. Within months, the bank finalized a merger with MBT Financial Corp. There was no response to messages sent to the bank.
BancorpSouth, which is buying Cadence, spent more than $ 10 million in 2016 to settle charges of discrimination against black candidates in Memphis. Regulators said they sent undercover testers to apply for a loan and found they were treated worse than white testers with similar credit.
When BancorpSouth finalizes the takeover, five Cadence executives are expected to share more than $ 26 million, according to a regulatory filing. Redlining settlements tend to start with commitments from banks to follow fair housing laws. This does not satisfy Richard Rothstein, who wrote “The Color of the Law”, a story of segregation in 2017. People are not allowed to cure bad behavior “by simply saying,” We are not going to start over. “”, did he declare. “In this case, that’s what we accept.” Redlining has “permanent effects which require remedies as explicit as the violations in the first place,” he added. “I don’t expect to see them until there is a new civil rights movement.