🔒After redlining lawsuit stalled Liberty Bank-Simsbury Bank merger, other lenders worry about legal fallout

The impending merger between Liberty Bank and Simsbury Bank has stoked their peers’ interest in a way not seen in years, if ever.

With Liberty and Simsbury close to finalizing their $71 million combination, other Connecticut mortgage lenders may still be quaking from the jolt Liberty received when, while in the midst of negotiating the deal, one of Connecticut’s leading fair-housing advocates accused it of redlining against minority and low-income mortgage borrowers.

That suit derailed merger talks for months, newly released documents filed with the U.S. Securities and Exchange Commission show, while Liberty and the Connecticut Fair Housing Center — which had never sued a lender in its 25-year history — crafted an out-of-court settlement satisfactory to both.

On March 4, the CFHC and Liberty announced a settlement in which the bank agreed, without admitting or denying guilt, to open a Hartford loan office as one of the settlement conditions. It also agreed to submit its employees, officers and directors to re-training on state/federal lending guidelines. Seventeen days later, on March 21, it disclosed its definitive merger deal with Simsbury Bank.

But while Liberty appears to have left its mortgage-compliance ordeal behind, other lenders privately worry that CFHC will target one or more of them with redlining-discrimination claims, banking observers say.

Bankers are also concerned about such lawsuits disrupting future mergers.

The reason, says CFHC Executive Director Erin Kemple, is that her advocacy agency, when reviewing publicly available data about lenders’ applicant approval-rejection rates and the reasoning for each, found “no one had done a good job’’ with their mortgage-lending compliance.

Kemple declined to say whether more lawsuits from CFHC and co-plaintiff, the nonprofit National Consumer Law Center in Washington D.C., are forthcoming.

However, she said the Liberty lawsuit and settlement “definitely should be’’ a warning to lenders who either know or suspect they are non-compliant.

Kemple insists CFHC was unaware of Liberty’s confidential merger talks with Simsbury Bank’s parent before or after it filed its lawsuit.

In a statement, Liberty CEO David W. Glidden said “both Simsbury Bank and Liberty Bank always wanted the merger to happen and worked to make it happen.”

Matthew Smith, director of government relations and consumer affairs at the state Department of Banking, said his agency was unaware of CFHC’s mortgage-lender performance review and cannot verify what data was sampled.

Smith noted, however, the banking department routinely reviews mortgage-lending practices of state-chartered institutions for Community Reinvestment Act (CRA) compliance, as does the Federal Deposit Insurance Corp., the federal government insurer of bank deposits.

The state’s CRA assessment considers such characteristics as loan-to-deposit ratio; assessment area concentrations; geographic distribution of loans; borrowers’ profiles; and response to substantiated complaints, Smith said. The state agency also weighs investment- and services track records when evaluating larger institutions.

According to Smith, the FDIC conducted CRA reviews of Liberty in 2017 and Simsbury Bank in 2018, each receiving ratings of “outstanding” and “satisfactory,” respectively. In 2017, state regulators graded Liberty’s CRA efforts “outstanding.’’ Smith noted the state received no formal complaints against the merger.

Worried lenders

Conversely, CFHC didn’t hold back on its assessment and criticism of Liberty Bank, accusing it of violating the Fair Housing Act. It analyzed publicly available mortgage-loan data from 2010 to 2016 that banks are required to disclose under the federal Home Mortgage Disclosure Act.

The lawsuit accused Liberty Bank of structuring its residential mortgage lending business to avoid serving the credit needs of individuals in areas predominantly occupied by African-American or Latino populations.

For example, only 3.34 percent of Liberty Bank’s total mortgage originations (including refinacings) from 2010 to 2016 were to African-American and Latino applicants, the suit said.

The lawsuit also said the bank strategically positioned branch offices and mortgage loan offices in areas of majority-white neighborhoods and have treated prospective loan applicants differently based on race or ethnicity.

Leonard Suzio, president of GeoDataVision, a Wallingford adviser helping banks comply with their CRA obligations, said he got calls from nearly two dozen Connecticut banks days after CFHC and National Consumer Law Center filed their suit.

They worried, Suzio said, about tightened lending and reporting rules and other potential fallout from the lawsuit.

But Suzio labeled as “gross exaggerations” Kemple’s assertion that nearly all Connecticut home-loan lenders are out of compliance with state-federal lending rules. He added that banks rarely flout anti-discrimination rules in mortgage lending.

“I’ve never seen a situation where there’s explicit discrimination going on,’’ said Suzio, a former GOP member of the state Senate. “Usually, it’s a failure of procedures to ensure this doesn’t happen.’’

Despite that, Suzio also points to what he sees as a new front challenging banks’ efforts to win public and regulatory approval to expand their operations through mergers and acquisitions.

Since the adoption of the Community Reinvestment Act of 1977, banks have been prodded by policymakers and regulators to adopt policies that engage and benefit low-income and minority bank customers in their markets. They range from decisions on where to open, or shut branches; products and services, such as low-fee or no-fee checking/savings accounts; and financial-literacy training for needy or minority borrowers.

Following the 2008 near global financial meltdown, triggered partly by the U.S. subprime-mortgage lending fiasco, and subsequent Great Recession, Congress beefed up regulatory oversight of banks and other lenders through tightened regulations that also spawned the Consumer Financial Protection Bureau. The federal agency, which has been in the crosshairs of the Trump administration, is tasked with ensuring compliance by lenders and other regulated financial entities, and being watchful for new or potential threats to consumers’ financial safety.

One outgrowth of the tightened oversight is that banks now must report in much greater detail data such as the racial/ethnic makeup of consumer- and mortgage-loan applicants; clearer, more reasonable explanations for denying loans to all borrowers; and filing their comparative ratios of loan-rejection rates for minority and low-income borrowers against their historical rejection-approval rates and those of their peer lenders.

Suzio said the banking community is awaiting the release of revised 2018 Home Mortgage Disclosure Act data tracking lenders’ loan approval/rejection rates. The original data set was delayed, Suzio said, due to a higher error rate from banks struggling to comply and report accurate information. The full 2018 lending report is expected in September, he said.

Mounting activism

But where regulators tend to be dispassionate participants in the review-approval process, Suzio said, activist individuals and organizations, acting on the public’s behalf, sometimes wield sway on decisions in which the benefits to the public are paramount.

However, the formal banking data that regulators and activists use to decide who’s compliant or not is sometimes either incomplete, outdated or misinterpreted.

He recalled that former Manchester Savings and former New Haven Savings ran afoul of local activists who claimed data showed each had not done their best to serve the needs of low-income and minority homebuyers in their markets.

Yet, Suzio said, when his firm looked closer, it found that data for each had been improperly compared to data that either was inconsistent or irrelevant. The result was, he said, both institutions were not the bad actors they were portrayed to be.

Still, with the meter running to close their merger, Manchester Savings and New Haven Savings agreed to fork over $30 million to settle the activists’ legal action. One outcome is that New Haven got a community-development bank from the settlement.

The new data mandated under the Consumer Financial Protection Act will likely paint a more nuanced portrait of Connecticut and U.S. lenders’ compliance efforts, Suzio said.

“Everybody’s waiting for that to come out,’’ he said. “There’s so much more detailed information available.”