In the spring of 2018, bank regulators trained to spot discriminatory lending detected something alarming at Bank of America.
The bank was offering fewer loans to minority homebuyers in Philadelphia than to white people in a way that troubled examiners from the Office of the Comptroller of the Currency (OCC), according to two people directly involved in the probe and internal documents reviewed by ProPublica and The Capitol Forum.
The officials suspected the second-largest bank in the United States was “redlining,” or deliberately turning its back on minority homebuyers, the people said.
But after complaints from Bank of America, the OCC’s investigation stalled by September 2018. The OCC, which is part of the U.S. Treasury Department, never sanctioned the bank.
The abandoned Bank of America inquiry is part of a larger, previously unreported pattern in which the Trump administration has pulled back on civil rights enforcement as a part of its overall relaxation of bank oversight.
Since President Donald Trump took office, the OCC has quietly shelved at least six investigations of discrimination and redlining, according to internal agency documents and eight people familiar with the cases. Flagstar Bank, a leading lender in Michigan, wrongly charged Black homeowners more through a network of mortgage lending affiliates, OCC officials concluded in 2017. That same year, agency examiners found that Colorado Federal Bank, an online lender, was doing the same to female borrowers.
Another inquiry by OCC officials concluded that Chicago-based MB Financial, a lender acquired by Fifth Third Bank last year, charged Latinos too much on mortgage loans. Cadence Bank, a lender in several Southern states, was turning away minority borrowers in Houston, according to an OCC investigation. Fulton Bank, a lender based in Pennsylvania, had been discriminating against minorities in parts of Richmond, Virginia, and its home state, regulators concluded.
In each case, despite staff recommendations that fines or other penalties be imposed, the OCC took no public action and closed the investigations quietly. In the past, banks have had to pay substantial sums after similar investigations. In 2012, in the wake of the housing crisis, Wells Fargo paid $175 million to resolve allegations that it charged Blacks and Hispanics more to buy a home after an investigation that began with the OCC years earlier.
Each of the banks declined to comment on the specifics of the investigations and said they are committed to providing equal access to credit.
The OCC has historically prioritized the well-being of banks over bank customers, said current and former examiners, but the balance has shifted even further under the Trump administration.
“We have not always been the biggest defender of consumers,” said one veteran OCC attorney who has handled enforcement matters but asked not to be named for fear of losing his job. “Lately, though, we are outright hostile.”
Career staff and ordinary agency employees who have raised alarms about discrimination and other consumer abuses have seen their concerns brushed aside by the agency’s leadership, according to two current and two former OCC officials who have left in the last three years. The OCC was run from November 2017 until May of this year by Joseph Otting, a former bank executive with ties to Treasury Secretary Steven Mnuchin.
The administration has not only held back from redlining enforcement but tinkered with rules for applying the Community Reinvestment Act, a law that has helped combat discrimination for five decades.
Homeownership remains a key path to building family wealth in America, but the homeownership rate among blacks is 44 percent compared to whites at 74 percent, according to the most recent census data.
One major obstacle to narrowing that gap is discrimination in mortgage lending. A 2019 study by the Consumer Financial Bureau found that white borrowers are more likely to get a home loan than Black borrowers with the same credit score.
Yet in June 2018, as OCC examiners on the ground in Philadelphia scanned loan records and interviewed Bank of America employees to detect discrimination on mortgages, Otting testified before Congress that he had never seen racial bias in banking. “I have not personally observed that,” Otting told the House Financial Services Committee, stunning lawmakers with a statement that he tried to walk back a day later, telling the Senate Banking Committee that “there’s lots of evidence of inequity in the world.”
Brian Brooks, a former bank executive who has led the OCC on an interim basis since Otting stepped down in May, said recently that public enforcement actions were of limited value in addressing the “root cause” of banking discrimination. “The root cause is not going to be solved by bringing an enforcement action against some small bank,” Brooks told Politico.
In a statement to ProPublica, Brooks said: “I will not comment on decisions and actions that preceded me, but under my leadership the OCC will use all our tools as warranted to ensure everyone has fair access to banking services and receives fair treatment from the banks and savings associations the OCC oversees.”
The OCC is the grandaddy of banking regulators, conceived under Abraham Lincoln to make sure banks were safe and sound, and it has a unique role in fighting discrimination. The OCC is responsible for checking that national banks comply with the landmark Fair Housing Act of 1968, which banned redlining.
The agency also has a key role enforcing the Community Reinvestment Act, which requires banks to lend in poor neighborhoods and grades banks on how well they meet the goals of the law. Otting spent much of his two and a half years in office rewriting the rules for the CRA, and he stepped down the day after he unveiled a reform plan that gives banks more flexibility in satisfying the law.
In a different era, regulators and law enforcement worked together to try to stamp out racial bias. Eight federal agencies have a role in policing discrimination in the marketplace, and all are required to inform the Justice Department when they see it. The Justice Department received 22 fair lending referrals from a variety of agencies in 2016, President Barack Obama’s last year in office. In 2018, under Trump, the Justice Department received four referrals, according to the latest Justice report.
The Consumer Financial Protection Bureau has made a large share of fair lending referrals since the agency was created in 2010. During the Obama administration, the OCC made six referrals and worked closely with the CFPB on other fair lending cases, said Richard Cordray, the first CFPB chief.
“There was just a lot more cooperation and a lot more interest in taking on banks to protect consumers,” Cordray said of the Obama years. “That has changed dramatically.”
As Otting downplayed racial discrimination in his congressional testimony, his examiners in Philadelphia saw enough troubling data to take the next step in the probe. Officials involved in the Bank of America matter declined to say exactly what raised alarms except that it was rooted in data they saw about the price and availability of home loans.
OCC examiners can see information such as customer credit scores and the costs associated with a loan. Overall in the city, African-Americans are disproportionately denied when they seek to purchase homes, according to reporting by Reveal.
The examiners brought in OCC lawyers who were trained to tell when a bank’s lending practices could be deemed discriminatory, according to two people involved in the Bank of America matter. Bringing OCC lawyers into an exam often signals that the agency is moving toward an enforcement action, said former examiners. When the OCC brought in its lawyers, Bank of America bristled.
Bank of America’s chief counsel’s office insisted that its own attorneys be in the room if OCC examiners wanted to keep talking to its employees. The OCC exam manual explicitly discourages such involvement. When conducting investigations, OCC examiners should generally resist allowing a bank’s lawyers to be part of a routine exam since that “may be an unacceptable restriction on the examiner’s access to information,” according to portions of the exam manual seen by ProPublica.
As a routine exam becomes a deeper probe, the agency should allow examiners to finish their work to build a case, said the former examiners, who declined to be named since they still have professional dealings with the OCC. A bank’s lawyers would typically become involved in the later stages of an investigation if OCC examiners believed they had found wrongdoing, several former examiners said.
Nevertheless, Morris Morgan, the OCC’s head of large bank supervision, who had previously been the regulator’s top examiner overseeing Bank of America, agreed to the bank’s request to have its lawyers sit in early on the probe.
The OCC then took another step that potentially helped Bank of America. The agency assigned a separate team of OCC lawyers to scrutinize the whole Bank of America probe — an unusual step considering that the exam was still ongoing and that such a move could chill an investigation, said the two former examiners.
Moreover, said two officials involved in the probe, the OCC never fully engaged the expert economists, statisticians and other specialists of the agency’s Risk Analysis Division who are trained to spot patterns of abuse among hundreds of thousands of mortgage loans and who can help build a case against a bank.
Within the OCC, one step below the Comptroller is the Major Matters Supervision Review Committee, a panel that decides the most sensitive enforcement issues at the agency. Fair housing matters are typically decided by this committee, which is largely staffed by officials who report to the Comptroller. It’s not clear if Otting himself weighed in on the case. Otting did not respond to multiple requests seeking comment. The Bank of America probe was not brought before the committee.
By September 2018, the OCC had killed the Bank of America probe. The OCC did not bring any sanctions against the bank. The matter was shelved before examiners could decide if their first suspicions about Bank of America had merit, according to the two officials involved who said the agency’s investigation was halted before it could finish.
The OCC and Morgan both declined to comment on the Bank of America redlining matter, which involves confidential supervisory work. David Leitch, Bank of America’s chief counsel, declined to comment. Bank of America also declined to comment on the investigation but said: “We are committed to fairly and responsibly meeting the credit needs of our clients and to complying fully with the letter and spirit of fair lending laws, regulations and principles.”
A spokesman also pointed to a recent Bank of America statement that the lender has earmarked $1 billion in future corporate gifts and loans to help local communities fight inequality. The bank is still finalizing details of the plan.
In 2018, as OCC examiners in Philadelphia were looking at Bank of America, a separate team of examiners looking at loans in Texas spotted abuse at Cadence Bancorp, a regional lender based in Houston. Cadence was making minority borrowers pass a wealth threshold that white customers did not have to meet when they borrowed against the equity in their home in second-lien or “piggyback” mortgages, according to OCC documents reviewed by ProPublica and The Capitol Forum.
Examiners opened a formal investigation and pushed its findings through several internal reviews for most of 2018. The bank said any unequal treatment was accidental, but OCC experts did not find that credible. Experts within the Risk Analysis Division endorsed the Cadence findings. In controversial cases, the OCC gets a second opinion from its independent ombudsman, Larry Hattix, who backed the OCC staffers.
In December 2018, the OCC referred the redlining matter to the Justice Department as a civil rights concern. By early last year, the Justice Department had decided against taking action. It sent the matter back to the OCC but said the agency could use its own power to sanction the bank, according to a Justice Department spokesman.
“It is not unusual that we defer to the financial regulators,” said the spokesman. “Deferral may be appropriate, for example, when the lender has self-identified the problem, changed its policies, and compensated any affected borrowers.”
But OCC officials reporting to Otting decided last year not to publicly sanction Cadence, according to OCC documents and two people with direct knowledge of the matter.
In a statement, Cadence said that it could not comment on its dealings with the OCC but that it stopped offering piggyback mortgage loans last year and that the bank never discriminated. “Cadence Bank does — and always has — treated minority consumers in a fair and non-discriminatory manner and is always looking for ways we can do better,” the bank said.
In another investigation, OCC examiners scrutinized home loans at MB Financial, a lender based in Illinois, and found that Latinos and women were not being offered discount mortgages as often as white men, according to three people with direct knowledge of the matter.
This looked like deliberate bias, examiners determined after reviewing loan records, and by late 2018 economists at the OCC Risk Analysis Division agreed, as did Hattix, the agency’s ombudsman. The OCC referred the matter to the Justice Department as a discrimination case, but the DOJ, under Attorney General William Barr, sent it back, according to two people involved in the matter. If bank regulators wanted to punish MB Financial, they would have to do it themselves.
In the end, the OCC did nothing. MB Financial was bought by Fifth Third Bank, an Ohio lender, and essentially slipped out of OCC jurisdiction. The OCC notified the Federal Reserve, which oversees Fifth Third, about what it found at MB Financial. The Fed has the ability to block mergers if it sees wrongdoing but it allowed the MB Financial deal to go ahead.
“Discrimination has no place in our society and the Fed takes these issues seriously in its role overseeing banking organizations,” a Fed spokesman said. “However, the Fed does not have direct supervisory authority over all banks.”
In a statement, Fifth Third said: “The intent of Fifth Third is to be in full compliance with all fair lending regulations. MB Financial had a similar intent.”
Two of the scuttled redlining investigations involved banks that use outside agents to originate a significant portion of their mortgage loans. The OCC found that agents working for Flagstar Bank of Michigan were charging Black homebuyers more than whites and Colorado Federal, an online lender, was charging women more than men, according to two people involved in the matters. Both cases had come to light during the Trump administration, and both were dropped without a public enforcement action.
Flagstar Bank declined to comment for this story. Colorado Federal did not respond to several requests for comment.
Regulators fall short if they turn a blind eye to discrimination or only issue quiet reprimands and private wrist-slaps when they find abuses, said Jeremy Kress, a former Federal Reserve attorney.
“Banks are less likely to misbehave if they think they are going to be called out for wrongdoing,” he said. “We can’t rely on regulators to do their job in secret, as recent scandals have shown.”