Client Alert: DOJ Reaches Settlement with Citizens Republic Bancorp, Inc. and Citizens Bank in Lending Discrimination Suit
May 11, 2011
As we first reported in InfoBytes last week, the U.S. Department of Justice ("DOJ") has reached a settlement with Citizens Republic Bancorp Inc. and Citizens Bank of Flint, Michigan (together, "Citizens") in a lawsuit alleging redlining discrimination in Detroit. The lawsuit specifically alleged that Citizens had violated the Fair Housing Act ("FHA") and Equal Credit Opportunity Act ("ECOA") by serving the credit needs of the residents of predominantly white neighborhoods to a significantly greater extent than it served the credit needs of majority African-American neighborhoods.
Thomas Perez, Assistant Attorney General in charge of DOJ’s Civil Rights Division, was quoted in the Detroit News as calling the settlement "innovative" and noting that it may serve as a model in other areas. Mr. Perez further stated that DOJ is involved in 60 cases nationwide involving similar accusations of discriminatory lending practices.
The $3.6 million settlement includes provisions under which Citizens will open a loan production office ("LPO") in a majority black neighborhood, partner with the City of Detroit ("Detroit") to administer a $1.625 million grant program to provide matching grants of up to $5,000 to existing homeowners, and invest at least $1.5 million in a special program to increase residential mortgage credit to residents of majority black census tracts. Citizens also committed to spend $500,000 for outreach and consumer financial education.
The settlement crystallizes several trends that we at BuckleySandler LLP have observed in our own representations of banks and other lending institutions fighting allegations of redlining before the federal regulators and DOJ:
- You buy it, you own it, warts and all. The Federal Reserve Board referred the Citizens matter to DOJ based on its finding that Citizens had engaged in a pattern or practice of redlining from 2006 to 2008. That finding was predicated in large part on lending data from Republic Bank, which merged with Citizens in 2007. Nevertheless, the DOJ also alleged that Citizens, by not adequately addressing Republic’s redlining patterns and practices, continued them.
- DOJ wants banks to have a physical presence in the inner city. As part of the settlement, Citizens agreed to open a LPO in a majority-black census tract within Detroit. The LPO must "bear signage similar to that used for Citizens Bank branch offices [and be] in a retail-oriented space in a visible location." Indeed, although the settlement agreement acknowledges that opening a new full service branch in Detroit is not feasible at this time due to Citizen’s current financial condition and Detroit’s weak economy, it also contains provisions that could allow for DOJ to require Citizens to open such a branch. Citizens, for example, must continue to evaluate the feasibility of a branch in a majority-black census tract and regularly report its evaluations to DOJ. The settlement, moreover, provides that the "United States reserves the right to move this Court to impose an appropriate remedy in the event that the parties cannot reach an agreement regarding the feasibility" of opening a branch in a majority-black census tract.
- CRA assessment area delineations can be used against you in a court of law. Following its merger with Republic, Citizens adopted Republic’s Community Reinvestment Act assessment area for metropolitan Detroit. According to the DOJ complaint, that delineation "formed a virtual horseshoe around and excluded most majority-black census tracts in the City of Detroit." Citizens revised its assessment area to include all of Detroit during the course of the investigation.
- Fair lending compliance trumps CRA compliance. In In its public performance evaluation of Citizen’s 2005 to 2007 CRA compliance, released in December 2010, the Fed stated that Citizens’ CRA performance was "satisfactory." However, based on its alleged noncompliance with the FHA and the ECOA, the bank’s rating was lowered to "needs to improve." A less than satisfactory CRA rating substantially reduces a bank’s ability to merge or acquire.
We have several broad recommendations for banks in this environment of heightened regulatory attention to redlining:
- Careflly evaluate and expeditiously address any fair lending exposure that may result from an acquisition or merger. Although Citizens became responsible for Republic’s record of fair lending compliance upon consummating the merger, Citizens may have been able to mitigate its exposure had it expeditiously acted to identify and address any concerns. Indeed, the DOJ complaint focused in part on Citizens post-merger activity, noting that its only presence in Detroit was a limited service ATM opened "well after the Board started its fair lending examination." Similarly, the DOJ’s Complaint stated that Citizens had failed to include Detroit in its CRA assessment area until after (i) the Board had informed Citizens that the delineation violated the CRA and (ii) DOJ had informed Citizens of its redlining investigation.
- Review your branch locations. Citizens has a major presence in Michigan and in the Detroit metropolitan area, but no branches located within Detroit itself. This raised a red flag to banking regulators and DOJ, which characterized Citizens as "engaged in a race-based pattern of locating or acquiring branch offices." Institutions with no or very limited branch presence in an inner city but considerable presence elsewhere in the same metropolitan area should consider expanding their branch system to the inner city.
- Delineate your CRA assessment area so it does not exclude majority-minority census tracts. DOJ cited Citizen’s "horseshoe" shaped CRA assessment area, which excluded most of Detroit, as evidence of its intent to redline. Banks should consider including whole cities, counties or metropolitan areas in their CRA assessment areas to avoid delineations that translate into maps showing that adjacent high minority areas are not part of the banks’ community.
- Make sure your internal assessment of fair lending performance addresses redlining allegations. Increased regulatory emphasis on redlining means that banks need to pay particular attention to whether they are at risk for allegations of redlining based on their lending and related activity. To this end, banks should be prepared to show that they have acted equally to meet the credit needs of majority-minority and majority-white census tracts. In addition to evaluating branch locations and CRA assessment areas, banks should carefully monitor loan data to determine whether an appropriate volume of loan applications and originations emanate from minority areas and individuals. Banks, moreover, should (i) be able to demonstrate active outreach to and involvement with community development and advocacy organizations and (ii) ensure that any public pronouncements regarding service strategies include minority areas and residents. For example, the DOJ’s Complaint cited a Citizens filing with the SEC in which the bank omitted Detroit from the areas in southeastern Michigan it planned to serve.