Redlining, which starved minority communities of loans to buy homes, has allegedly returned in New England.
The City of Providence sued Santander Bank NA on Thursday, accusing it of curtailing mortgage lending to black and Hispanic residents, while aggressively pursuing white borrowers, a practice known as redlining. City officials said applications to the bank for prime loans from minority neighborhoods fell by more than 60 percent in recent years.
Moreover, the Providence lawsuit said Santander is practicing similar lending bias elsewhere in New England, including Boston.
“Redlining is back again,” said John Relman, a Washington, D.C.-based lawyer representing Providence. “There’s been a drying up of credit in the minority community.”
Santander denied the allegations. Santander is owned by Spanish banking giant, Banco Santander SA, and has its US headquarters in Boston.
“We categorically reject this accusation and will vigorously defend ourselves against the legal action,” bank spokeswoman Mary Ellen Higgins said in a statement. “However, we are willing to work with the City of Providence to allay its concerns.”
Redlining became such an issue that in 1992 the Boston Federal Reserve Bank published a landmark study that found systemic racial discrimination in mortgage lending among the region’s banks. The study led to federal and state investigations into dozens of banks. Shawmut Bank paid a $960,000 settlement related to its lending practices at the time. And regulators tightened their oversight of bank lending.
And signs of the same problems have cropped up again in recent years.
In 2011, a Michigan-based bank agreed to pay $3.1 million to settle allegations by the US Department of Justice that it avoided making loans in Detroit.
In 2012, then-Fed chairman Ben Bernanke voiced concerns that tighter lending practices following the financial crisis has made it much harder for black and Hispanic people to borrow than white people.
More common though, were complaints about the opposite problem: that banks were flooding minority communities with subprime mortgages, loans that came with easy terms but very high interest rates, and which many housing specialists said triggered a cascade of foreclosures.
Relman represented Baltimore in a complaint against Wells Fargo Bank in 2008, alleging the lender steered minority borrowers to subprime mortgages, even when they qualified for traditional loans at lower rates, then foreclosed on hundreds of homes in the city.
In 2012, Wells Fargo agreed to a $175 million settlement with the US Department of Justice over its subprime mortgage lending in cities, including Baltimore.
Providence officials first contacted Relman last year to look into lending practices that may have led to high numbers of foreclosures in their city.
Instead, Mayor Angel Taveras said he was surprised to learn that the more pressing problem was a drop-off in lending to minority residents since 2006. Among lenders, Taveras said Santander’s decline in loans was particularly stark.
Providence officials accused the bank of changing lending strategies after it was bought by Banco Santander in 2009. Santander was formerly known as Sovereign Bank.
“This has been damaging to the city in many different ways,” Taveras said. Residents who may want to invest in distressed neighborhoods can’t get the loans they need, exacerbating the foreclosure crisis, he said.
Relman and city officials studied home mortgage loan data that banks report to regulators and found gaps in applications originating in African-American and Latino neighborhoods for Santander in Providence and throughout the Boston region. The bank’s Boston footprint reaches from Lawrence to Worcester to Providence.
Specifically, in Providence, city officials said they found that applications to Santander for prime loans from minority neighborhoods declined by 61 percent, while those of other leading banks dropped by 37 percent.
In the Boston region, which includes Providence, the average number of mortgage originations by Santander after 2009 in minority neighborhoods declined by 36 percent, according to the lawsuit. Other leading lenders reported a drop of 7 percent. Meanwhile, lending by Santander in white neighborhoods increased by 34 percent during that time frame, according to the lawsuit.
In the Boston region, the ratio of loans that Santander denied in minority neighborhoods, compared to white neighborhoods, was the highest among the area’s top lenders, according to the lawsuit.
While many banks needed to tighten their lending standards following the housing crisis, Thomas Callahan, the executive director of the Massachusetts Affordable Housing Alliance, said he would not be surprised if they swung too far in the other direction.
But by his measure Santander has been a welcome supporter of lending programs that benefit minority borrowers; for example, the bank increased to $50 million, from $40 million, the money it provides to a program that helps first-time, low- and moderate-income homebuyers get mortgages, Callahan said. About 51 percent of the homebuyers in the program are members of minority groups, Callahan said.
Santander has “been not just involved, but been a leader,” he said. Callahan added that he has not reviewed the data outlined in the Providence lawsuit.
The federal Consumer Financial Protection Bureau, a regulatory watchdog agency formed after the recent financial crisis, is aware of lawsuit and alleged complaints, but would not comment on whether it would investigate.
Providence is seeking millions in damages from Santander, Taveras said, and hopes that federal regulators open investigations into potential redlining.
“I hope this is wake-up call,” Taveras said. “People who have good credit who can’t get loans — that’s a big problem.”