The redlining dragnet continues to ensnare banks trying to adapt their postcrisis lending practices.
Financial Institutions Inc., the Warsaw, N.Y., parent of Five Star Bank, agreed earlier this week to pay $900,000 and open two branches in Rochester, N.Y., to settle charges it excluded minority neighborhoods in the area from its mortgage business.
The $3.1 billion-asset company is the latest in a wave of banks of various sizes to get slapped for overlooking minority borrowers. New York Attorney General Eric Schneiderman, whose office pursued Five Star, is also going after the $834 million-asset Evans Bank, based on claims the Hamburg, N.Y., bank redlined predominantly black neighborhoods in Buffalo.
Providence, R.I., late last year dropped a lawsuit against Santander Bank, based on claims that bank has scaled back lending in black and Latino neighborhoods while increasing originations in predominantly white neighborhoods, after the bank committed $1.3 million in grants to support low-income neighborhoods in the city. Santander agreed last month to commit another $24 million in home loans to low- and moderate-income borrowers in Providence.
Lending patterns in minority neighborhoods have undergone a dramatic change since the financial crisis, said Gregory Squires, a professor of sociology and public policy & public administration and chairman of the sociology department at George Washington University.
"What we're seeing now are not neighborhoods being flooded with subprime loans, but the re-emergence of [traditional] redlining," Squires said, pointing to anecdotal evidence and aggregate Home Mortgage Disclosure Act data.
Still, it is unlikely that lenders are intentionally discriminating against minorities, Squires said. Problems crop up when seemingly benign internal policies result in discriminatory lending practices. Squires pointed to the absence of banks in minority neighborhoods as an example of possible redlining, along with policies establishing minimum loan amounts for mortgages, which he called "one of the most problematic practices."
The recent wave of redlining cases is not as flagrant as those that occurred in the 1960s and 1970s, said Warren Traiger, a lawyer at BuckleySandler. Modern claims of redlining are tied to situations like avoiding branches in minority neighborhood or failing to market in those communities.
For banks, "the trick is to find a balance," Traiger said. "You want to make every effort to do safe and sound banking, but you have to operate throughout your community. Sometimes where banks get tripped up is when they can't show they made the effort" to lend in all their local neighborhoods.
More redlining cases are likely to occur, Squires said, adding the enforcement is "an area of increasing focus."
Redlining cases rarely make it to trial, though the Evans case is apparently headed in that direction. After Schneiderman filed a lawsuit against the bank in the U.S. District Court for the Western District of New York, Chief Executive David Nasca promised a vigorous challenge.
Evans also said in its second-quarter earnings release that it had set aside $1 million for legal expenses tied to the case.
The last major federal redlining case was settled in May 2011, when Citizens Bank reached a $3.6 million accord with the Justice Department to address charges the Flint, Mich., bank avoided doing business in largely black neighborhoods in Detroit.
Five Star, meanwhile, ponied up to settle a charge from New York officials that none of the bank's 19 branches around Rochester were actually in the city, where blacks and Hispanics account for roughly 60% of the population. Officials also claimed that the bank had imposed a minimum mortgage requirement that had discouraged lending in minority communities.
"It's truly disheartening that in 2015 we are still confronting the systematic racial discrimination that has persisted throughout our history," Schneiderman said in a statement Sunday.
Five Star said in a separate statement that it had "cooperated fully" with the probe. Five Star, which agreed to pay the state $150,000, must also allocate $500,000 to create a financing program to provide discounts or subsidies to minority borrowers. The remaining $250,000 will go toward marketing and advertising to minority customers.
For its part, Five Star admitted no wrongdoing and said the two planned branches support its long-term growth strategy in Rochester. "We are pleased to come to a mutually beneficial agreement with" Schneiderman, Richard Harrison, Financial Institutions' chief operating officer, said in the statement.