Twin Cities bank at center of huge redlining case reaches settlement

A Minnesota bank at the center of a major legal fight concerning alleged discrimination in home mortgage lending has reached a settlement with the U.S. Department of Justice.

Under the settlement, KleinBank will expand its banking services in predominantly minority neighborhoods in the Minneapolis area. The bank will also commit $600,000 to loan subsidies and marketing in the new service area. And an executive will oversee efforts to increase lending in minority neighborhoods.

"Federal law prohibits lenders from discriminating against mortgage applicants and other potential customers based on race or national origin," said Acting Assistant Attorney General John Gore of the Justice Department's Civil Rights Division. "The Justice Department will continue to use its enforcement authority to combat this illegal discrimination."

The agency had sued Chaska-based KleinBank in January of last year, days before the Obama administration left office, accusing the company of redlining.

The Feds accused the bank of deliberately denying equal lending opportunities in neighborhoods where most residents are members of racial and ethnic minorities.

The government said comparable lenders were four times more likely to issue loans in those areas than KleinBank.

KleinBank CEO Doug Hile said it was an argument largely about geography and the how much the bank should be expected to lend outside of its historical service area.

"That was where the contention was," he said. "Should we be told where we have to do business?"

Hile said both sides decided their time and money would be better used for something else.

"We spent a fortune and at some point you say, 'Let's stop spending money doing this, arguing with each other, and let's spend money trying to figure out how to help these communities.' And that's the conclusion we came to," Hile said. "It was far better to reach a compromise with the Department of Justice that works for us and them and puts these resources to work in these communities."

The family-owned bank has 19 branch offices in the metro area, mostly in the west. It has assets of about $1.9 billion.

The lawsuit galvanized the banking industry in opposition.

"This was a very significant case, very significant for the industry," said Joe Witt, president of the Minnesota Bankers Association, which filed a friend of the court brief in the case. Scores of state banking associations joined, along with the American Bankers Association.

They do not condone redlining, their brief said, but the Feds were trying to apply a new definition of redlining. Witt said it would open all banks to new legal threats.

"There were many banks that could be subject to the same exact lawsuit," he said.

The industry argued the Feds failed to show there was illegal redlining under long-standing federal policy.

Bankers contended that there's no evidence KleinBank intended to discriminate, as required for a redlining case. They pointed out KleinBank got favorable ratings from its regulator, and argued the bank has a right to define its own service territory.

The KleinBank lawsuit was an effort by the Obama administration to move the goalposts and make it easier to prosecute redlining based on a lower standard of proof, said Philadelphia attorney John Culhane, who counsels banks on fair lending compliance.

"They were definitely pushing the envelope with these arguments," he said.

The DOJ's analysis was part of the controversy. The department concluded there was discrimination simply based on KleinBank's office locations and lending track record in largely minority and white neighborhoods.

The banking industry maintained that's insufficient because it doesn't show any individuals suffered an adverse impact from KleinBank's practices.

Some observers found it out of character that the Trump administration pursued the KleinBank case.

Fair housing lending advocates said the Trump administration is clearly not inclined to identify and fight lending bias.

Mick Mulvaney, President Trump's acting head of the Consumer Finance Protection Bureau, for example, has been openly contemptuous of the agency he now runs.

"We just have seen a general retreat from enforcing the fair lending laws and ensuring that fair housing opportunities are available to everyone," said Melissa Stegman, senior policy counsel at the Center for Responsible Lending.