HCBK (MM)

By AnnaMaria Andriotis And Rachel Louise Ensign 

The Justice Department and Consumer Financial Protection Bureau reached a settlement with Paramus, N.J.-based Hudson City Bancorp Inc. on Thursday over allegations that the lender intentionally withheld giving mortgages to minorities.

Regulators described the $33 million settlement as part of a larger effort under way to stop discriminatory lending.

Between 2009 and 2013, the bank avoided locating branches and loan officers in areas with large African-American and Hispanic populations and excluded these groups from marketing strategies, a practice the Justice Department and CFPB described as redlining.

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

Hudson City didn't immediately respond to requests for comment, though the Justice Department in a conference call said the bank neither admitted nor denied wrongdoing. 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.

The agreement represents the largest residential mortgage redlining settlement in the Justice Department's history and is the first redlining action for the CFPB, which was launched by the Dodd Frank financial law of 2010.

According to the Justice Department's announcement Thursday, "redlining" is 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.

"Redlining is not a vestige of the past," said Vanita Gupta, head of the Justice Department's Civil Rights Division on the conference call. The Justice Department said it has increased the number of active mortgage-redlining investigations to its highest level in the past six years.

"Banks and lending institutions should be on notice that the Justice Department continues to focus on discriminatory conduct in mortgage lending and that such conduct won't be tolerated," said Ms. Gupta. "Banks continue to build and structure their lending operations in a way that avoids or fails to meaningfully serve communities of color."

"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 expects to find out by the end of this month whether banking regulators will allow it to be bought by Buffalo, N.Y.-based M&T Bank Corp. The $3.7 billion tie-up was first announced more than three years ago and is now the longest-delayed U.S. bank deal on record valued at more than $100 million, according to Dealogic.

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

The two banks have said they expect the Federal Reserve to make a decision either approving or denying the deal by Sept. 30. The chief executives of Hudson City and M&T in April said that the deal remains a good one for both parties.

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

The CFPB has been expanding its scope of discriminatory allegations against lenders. 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

The findings of Hudson City's alleged wrongdoings first emerged in March 2014 during an examination by the CFPB. The CFPB says the investigation looked at branch development dating back to 2004 to determine what effects it had on cutting off minority borrowers from credit between 2009 and 2013, the time period the settlement covers. Between 2004 and 2010, the bank opened or acquired 54 branches and hasn't opened one since, 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 all of its branches and referred applicants to one of seven loan officers in branches "outside of and not in proximity to majority-Black-and-Hispanic areas," according to court papers. The complaint adds that none of the seven loan officers were black or Hispanic or spoke Spanish.

Lisa Beilfuss contributed to this article.

Write to Lisa Beilfuss at lisa.beilfuss@wsj.com

(END) Dow Jones Newswires

September 24, 2015 16:30 ET (20:30 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.