Justice Department to investigate "digital redlining" in lending
The Justice Department announced Friday a cross-government effort to investigate and prosecute redlining, the practice of banks discriminating against racial minorities or certain neighborhoods. It is the first major expansion of redlining investigations since the Obama administration.
As part of the effort, the Justice Department as well as the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency also announced a new redlining case against Trustmark Bank for its treatment of Black and Hispanic borrowers in Memphis, Tennessee.
Despite a half century of laws designed to combat redlining, the racist practice continues across the country and the long-term effects of redlining are still felt to this day.
The average net worth of a Black family is a fraction of a typical White household, and homes found in historically redlined neighborhoods are still worth less than homes found in non-redlined communities.
Researchers at the mortgage giant Freddie Mac found that 12.5% of homes appraised in Black communities were valued at less than the original cost of constructing the home. That figure compares to 7.4% of homes in White neighborhoods and as 9.4% of homes in Latino areas, the analysis found.
For many Black and Latino Americans, owning a home is the first step toward building generational wealth. An appraisal gap would likely bar those households from growing equity in their homes, crippling their chances of borrowing against the property or selling it at a greater profit later.
"Lending discrimination runs counter to fundamental promises of our economic system," said Attorney General Merrick Garland, in prepared remarks. "When people are denied credit simply because of their race or national origin, their ability to share in our nation's prosperity is all but eliminated."
Garland said the Justice Department is investigating several redlining cases and expects the agency to open more in the coming months.
"Digital redlining"
While there are still cases of historical redlining — where banks exclude certain neighborhoods — the Biden administration is focusing a significant part of this effort on modern-day redlining, which can often come from the algorithms and software banks use to decide whether to approve a loan.
The CFPB will be focusing much of its effort on algorithmic redlining, CFPB Director Rohit Chopra said Friday.
"Digital redlining may simply engrain old forms of discrimination," he said.
The Justice Department, CFPB and OCC reached a settlement against Trustmark National Bank on Friday that would end allegations that the bank redlined certain neighborhoods in Memphis.
Trustmark, a bank primarily found in the South with $13 billion in assets, will be required to open mortgage offices in redlined neighborhoods as well as contribute $3.85 million toward a fund to create loan subsidies for borrowers in these discriminated neighborhoods. The bank will also pay a $5 million fine to the CFPB and a $4 million fine to the OCC.