By Emily Flitter and Kriston Capps | Bloomberg
The US government is retreating from its mission of ensuring banks and other big financial companies don’t discriminate against neighborhoods with high populations of racial minorities when making home loans.
The practice of redlining — denying financial services to entire neighborhoods — has for years been a key focus of the Department of Housing and Urban Development, whose lawyers have fought to enforce fair-housing laws that ban it. But a recent internal memo, obtained by Bloomberg News, says HUD investigators should no longer consider how financial firms behave in particular neighborhoods, focusing instead on how the companies treat individuals.
The shift nearly eliminates the chances the department will pursue new redlining cases under the Trump administration, experts say.
For communities with high concentrations of racial or ethnic minorities, that means the federal government will not keep close tabs on whether they have equal access to well-priced mortgages, affordable home insurance and other financial services. Most lenders are unlikely to change their current practices, for fear that a future Democratic administration would reverse course and resume enforcement. But for the next few years at least, redlining no longer appears to be a federal priority.
“Under the guise of redefining what is a protected class, the administration is trying to rewrite the fair housing laws to say that you can no longer look at the obvious consequences of what a bank does — where it chooses to lend and where it chooses not to lend — when you’re opening an investigation,” said John Relman, founder of the Washington law firm Relman Colfax and a specialist in housing discrimination cases.
A HUD spokeswoman said redlining remains “an area of investigation” for the agency. But the Sept. 16 memo says guidance issued to investigators under previous administrations “muddled” the meaning of anti-discrimination laws by “asking staff to assess the racial composition of neighborhoods.”
“The Fair Housing Act plainly prohibits discrimination against individuals based on protected characteristics, yet notably does not divide Americans into protected minority and unprotected majority groups,” says the memo from John Gibbs, HUD’s principal deputy assistant secretary for fair housing and equal opportunity.
The memo’s existence was first reported by The New York Times. The new directive at HUD comes as President Donald Trump pivots away from policies seeking to protect minorities from discrimination, arguing that such policies promote race-based favoritism.
HUD has already slashed spending on fair housing enforcement and reassigned lawyers and other career employees once focused on it. Staff in the fair housing division are telling some potential plaintiffs to withdraw their complaints because they won’t receive a full and fair hearing, according to a HUD attorney who was not authorized to speak about the memos. The agency has also throttled work by field offices across the country by requiring even voluntary settlements to be approved by top personnel.
The new, written guidance on redlining will further limit staff investigations, experts warn.
“Before now we had not had that in written form. But I can tell you it’s already dragging things to a halt,” said Sasha Samberg-Champion, special civil rights council for the nonprofit National Fair Housing Alliance and HUD’s former deputy general counsel for enforcement and fair housing under President Joe Biden.
Representatives for the American Bankers Association, the Mortgage Bankers Association and the Independent Community Bankers of America declined to comment.
Lori Sommerfield, a partner at Troutman Pepper Locke in Washington who specializes in helping financial firms deal with regulators on fair housing and lending issues, said it was unlikely banks would change their behavior, despite HUD’s shift.
“Any bank would be foolhardy to think that they now have a free ticket to engage in redlining,” she said. “If there was an administration change to a Democratic administration, one would assume that redlining investigation and enforcement actions would be back on the front burner.”
Redlining in its most explicit form was key to Congress’s passage of fair housing and lending laws. Early in the 20th Century, financial firms and government officials across the US used color-coded maps of over 200 different cities, issued by the government-sponsored Home Owners Loan Corporation, that separated neighborhoods into categories according to who lived in them. They used the maps to determine which neighborhoods would get an array of services, from loans to home insurance to trash collection.
In his memo, Gibbs declared that a 2014 directive to HUD staff laying out how investigators should look at redlining — by determining whether a particular person or group of people had been denied loans or insurance policies based on the locations of their homes — was “legally unsound and will not be used” by HUD’s investigators. He added that officials were still working on a “full review” of fair housing enforcement procedures.
“The Biden administration created a massive backlog of cases by pursuing dubious legal theories and speculative harm of discrimination that allowed legitimate complaints to languish,” said HUD spokeswoman Kasey Lovett. She added that HUD’s inspector general had recently chastised the agency over the backlog. “We are undoing that backlog by prioritizing cases where there is evidence of intentional discrimination as defined by federal civil rights law,” she said.
Redlining is an example of disparate impact, the legal theory that a policy can have a discriminatory effect even if that is not its stated aim. The US Supreme Court affirmed in 2015 that the Fair Housing Act indeed applies to such cases. But banks and other financial firms have argued that it was unfair for the government to punish them for outcomes they did not intend to create.
Housing advocates say the memo’s directives could apply to a much broader group of federal officials than just HUD employees themselves, since other departments rely on HUD’s interpretation of the Fair Housing Act. Such agencies could include the Department of Justice, the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau, said Samberg-Champion, the civil rights lawyer. “It’s going to matter to all the institutions that are charged with combating redlining,” he said.
Those agencies already seem to have embraced the philosophy. The CFPB, for instance, tried and failed to overturn a recent redlining settlement it had reached with Chicago mortgage lender Townstone Financial, Inc., a case opened during Trump’s first presidential term. The Justice Department has also sought to end court-imposed monitoring and remediation programs on banks recently accused of redlining.
Gibbs’s memo describes the changes as being part of an effort to reduce HUD’s caseload, saying the department was spending time and effort on cases it should not pursue. But agency attorneys say they’re required to investigate every claim they receive, with no authority to prioritize one kind of case over another. Moreover, the department’s new approval process has led to a bottleneck: A field officer said HUD staff have recently had to ask complainants for damages worksheets to justify agreements that have been awaiting signatures from headquarters for months.
In a second memo issued on Sept. 17, Gibbs detailed a list of HUD advisories to lenders and other financial firms that the department now sees as “inconsistent” with the text of the Fair Housing Act. Several were published under former President Joe Biden, but others had been in place for longer, including one issued during Trump’s first term protecting people with service animals. The oldest piece of guidance on the list was from 2007, when George W. Bush was president. It lays out protections for non-English speakers receiving federal housing assistance.
HUD staffers told Bloomberg they had used the rescinded advisories to resolve a large portion of complaints they received.