HCBK (MM)

By AnnaMaria Andriotis And Rachel Louise Ensign 

Federal officials reached a settlement with Hudson City Bancorp Inc. over allegations that the Paramus, N.J., lender intentionally withheld mortgages from minorities, signaling renewed interest in an area that drew focus decades ago.

The Justice Department said Thursday there could be more cases to come against banks over a practice known as "redlining," which was barred after an outcry in the 1960s and '70s that banks were discriminating against minorities.

If the settlement is approved by the U.S. District Court in New Jersey, Hudson City will pay nearly $33 million, including about $27 million for loan subsidy and outreach programs to minorities and a $5.5 million penalty.

"Redlining is not a vestige of the past," said Vanita Gupta, head of the Justice Department's Civil Rights Division on the conference call with the Consumer Financial Protection Bureau to discuss the settlement.

The $33 million case represented the largest-ever residential-mortgage redlining settlement for the Justice Department and is the first redlining action for the CFPB, conceived in the Dodd-Frank financial law of 2010.

"Discriminatory practices in the mortgage market undermine people's ability to buy a home and build long-term wealth," added CFPB director Richard Cordray. "Rooting out discrimination to ensure fair and equal access to credit for all qualified borrowers remains a priority."

Hudson City neither admitted nor denied wrongdoing but in a company statement said it "disagrees with the statistical analysis of loans relied upon by the DOJ and CFPB as the principal basis for [the] claims as well as the agencies' conclusions from their investigations."

It added that it settled the matter "to avoid litigation with these agencies so that it can focus on continuing to provide fair credit services to its customers and working to complete its pending merger."

The case settlement comes days before the bank is expected to get the final word from regulators on the fate of its long-awaited merger with Buffalo, N.Y.-based M&T Bank Corp., announced more than three years ago. The $3.7 billion proposed tie-up is now the longest-delayed U.S. bank deal on record valued at more than $100 million, according to Dealogic.

Shares of Hudson City rose nearly 4% after news of the settlement, with investors seeing the resolution as a positive sign for the merger. M&T rose less than 1%.

"With such a high-profile merger, these things kind of have to be cleared up before" the Federal Reserve signs off, said Brian Klock, an analyst at Keefe, Bruyette & Woods.

The two banks have said they expect the Federal Reserve to make a decision either approving or denying the deal by Sept. 30.

The Justice Department defines redlining as the discriminatory practice by banks or other financial institutions to deny or avoid providing credit services to a consumer because of the racial demographics of the neighborhood in which the consumer lives. The Community Reinvestment Act of 1977 and similar measures bar lenders from redlining.

Regulators described the Hudson City settlement as part of a larger effort under way to stop discriminatory lending. The Justice Department says it has increased the number of active mortgage-redlining investigations to its highest level in six years.

Guggenheim analyst Jaret Seiberg said the settlement sets a "disturbing precedent" as it is likely the first in a series of similar redlining inquiries at larger banks. "This raises a risk for all banks that they're going to have to deal with the DOJ even more broadly than they already have to deal with them now."

Steve Zeisel, executive vice president and general counsel at the Consumer Bankers Association, said "lenders work very hard to ensure there is no discrimination in their lending practices and maintain robust compliance systems to protect against it."

The Justice Department has now reached settlements with seven mostly regional and small lenders since 2004 over accusations of redlining.

In court papers released Thursday, regulators said that between 2009 and 2013, Hudson City avoided locating branches and loan officers in areas with large African-American and Hispanic populations and excluded these groups from marketing strategies.

They also alleged the bank intentionally avoided inner-city areas with high minority populations in New York, New Jersey and Connecticut and instead focused on setting up locations in affluent suburbs with a predominantly white population.

Regulators have so far declined to clear the merger of Hudson City and M&T initially citing concerns about M&T's anti-money-laundering systems, which that bank then spent millions of dollars to bolster.

If the acquisition happens, M&T would become responsible for fulfilling some of the terms of the agreement, according to the settlement.

The CFPB has been broadening its search for discriminatory practices; the bureau has been investigating car-loan lenders since it opened its doors in 2011, alleging, along with the Justice Department, that some lenders' pricing policies are leading to car dealers charging minorities more in interest rates than other borrowers.

Hudson City's alleged wrongdoings emerged in March 2014 during a routine examination by the CFPB. The CFPB says the investigation looked at branch development dating back to 2004 to determine what effects it had on minority borrowers' access to credit between 2009 and 2013, the time period the settlement covers. Between 2004 and 2010, the bank opened or acquired 54 branches, according to court papers filed Thursday.

Using census data, the CFPB and Justice Department found that of the 135 branches Hudson City operates, nearly 90% are located outside majority black and Hispanic areas. Between 2009 and 2013, the bank didn't accept mortgage applications at some of its branches and referred some applicants to branches "outside of and not in proximity to majority-Black-and-Hispanic areas," according to court papers.

(END) Dow Jones Newswires

September 24, 2015 19:34 ET (23:34 GMT)

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