U.S. Presses Redlining Claims Against Minnesota Community Bank

By Chris Bruce

The U.S. government urged a federal judge not to throw out a discriminatory-lending lawsuit against a Chaska, Minn. community bank that industry peers say goes too far ( United States v. KleinBank , D. Minn., 17-cv-00136, response 8/25/17 ).

At issue is a Jan. 16 redlining lawsuit brought by the Justice Department’s civil rights division that says Minnesota-chartered KleinBank violated the Fair Housing Act and the Equal Credit Opportunity Act. According to the government, since 2010 and “at least” until 2015, KleinBank “intentionally avoided” providing home mortgage loans to minority neighborhoods near Minneapolis and St. Paul.

In June, KleinBank asked Judge Richard H. Kyle of the U.S. District Court for the District of Minnesota to dismiss the suit, saying the government failed to make out a plausible claim, but the Justice Department responded Aug. 25. Although KleinBank said the government failed to show that the bank engaged in intentional redlining, the Justice Department said its January complaint meets pleading requirements and shouldn’t be dismissed.

“The complaint alleges facts that support a plausible claim of intentional discrimination based on KleinBank’s avoidance of serving the majority-minority neighborhoods of the [metropolitan statistical area] because of the racial and ethnic composition of those neighborhoods,” the government’s Aug. 25 brief said.

Case Gets Noticed

Lawsuits and enforcement actions against banks alleging discrimination are closely watched, including several in recent years under the Fair Housing Act that have generated two important U.S. Supreme Court rulings, the most recent of which came in May.

However, the KleinBank suit has attracted significant attention, even though it’s still in an early phase. In its June motion to dismiss, Kleinbank said the government’s case assumes that KleinBank was required to expand into Hennepin County and Ramsey County, where the twin cities are located.

There is no such requirement, the bank said. “There is no law obligating KleinBank — a family-owned community bank — to expand into any particular county or neighborhood, or to match its service territory to that of any competitor,” the bank said in its bid to dismiss the suit. “The assumption that KleinBank should have generated applications and originations at the same rate as comparable lenders is similarly flawed and, indeed, raises serious constitutional concerns.”

Bankers Join Case

In June, more than 40 state and national banking groups filed a friend of the court brief in support of KleinBank, saying the lawsuit goes too far. They said redlining claims require plaintiffs to show that a defendant acted because of the race or national origin of consumers who would be served. However, the Justice Department’s complaint proposes a new definition of redlining that doesn’t include that standard, according to the brief.

“The bankers associations are concerned that the DOJ is attempting to expand the law, rather than enforcing the law as it is written,” said the Minnesota Bankers Association, which took the lead on the brief. It was joined by the American Bankers Association, the Independent Community Bankers of America (ICBA), and 40 state ABA-affiliated bank groups.

A ruling in favor of the Justice Department could have “serious implications for the entire banking industry,” they said. Under the standard put forward by Justice, the brief said, “the mere existence of a majority-minority neighborhood located outside a bank’s assessment area would automatically equate to redlining.”

“Changing the redlining definition and evidentiary standards in that manner would immediately subject banks all across the country to new legal, regulatory and reputational risk,” the banking groups’ brief said.

The court has scheduled a Sept. 22 hearing on the bank’s motion to dismiss.

KleinBank is represented by Amber Moren, Anupama D. Sreekanth, and John W Lundquist of Fredrikson & Byron in Minneapolis.

To contact the reporter on this story: Chris Bruce in Washington at cbruce@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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