A discrimination lawsuit the U.S. Department of Justice recently filed against a family-owned community bank in the Twin Cities’ western suburbs could become the first test of the government’s ability to force suburban banks to do business in inner cities.
The Justice Department, which sued Chaska-based KleinBank earlier this month, has filed a dozen similar lawsuits since 2002 against banks that operated primarily in suburban areas. The first 12 settled quickly, according to a Star Tribune review of federal fair lending cases.
But KleinBank, which has repeatedly passed federal reviews on its lending in low-income areas, is adamant that the government cannot tell it where to build branches or market its services.
“We will not admit to wrongdoing when we have done nothing wrong,” said Doug Hile, KleinBank’s president and chief executive. “At the end of the day, we’re confident that a fair review of our actual practices and procedures will vindicate us.”
In each of the previous cases, banks that had previously operated in affluent white suburbs agreed to open at least one new branch — and as many as four — in underserved minority neighborhoods. The banks also agreed to set aside as much as $25 million in below-market loans for minority borrowers and to aggressively promote those new lending opportunities.
Civil rights activists say such actions are critical in the rebuilding of minority communities that have been devastated by decades of neglect and predatory lending practices. Often, advocates point out, minority residents are forced to obtain high-interest loans at pawnshops, payday centers and check-cashing services because banks won’t do business with them.
“If you don’t have access to quality credit, your community is going to decline,” said Lisa Rice, executive vice president of the National Fair Housing Alliance, a nonprofit dedicated to ending discrimination in housing. “It is not going to grow and thrive like it should. Communities without credit are communities without hope.”
But Minnesota’s two trade groups that represent financial institutions maintain it is wrong to sue bankers to force change. They note the Justice Department has never been forced to prove a suburban bank has a responsibility to open branches in inner-city minority neighborhoods because no other case has been tested in court.
“This misguided action is an attack on one of our members, but it is also a serious threat to all community banks in Minnesota and across the country,” said Jim Amundson, president of the Independent Community Bankers of Minnesota. “KleinBank is a 110-year-old community bank with a clear history of serving the needs of their communities and doing so with integrity. I commend them for having the courage to stand up to this baseless attack.”
Justice Department officials declined interview requests. But in a recent interview with the New York Times, Vanita Gupta, the outgoing head of the department’s civil rights division, said she was proud of her “aggressive” record on civil rights.
“The project of civil rights has always demanded creativity,” Gupta told the Times. “It requires being bold. Often that means going against the grain of current-day popular thinking. It requires a more expansive reading of the law to ensure we are actually ensuring equal protection for everyone.”
KleinBank’s roots go back to 1907, when C.H. Klein bought stock in First National Bank of Chaska. The community bank is still owned by the family, now in its fourth generation.
From the beginning, KleinBank has avoided big-city competition. It bought up competitors in surrounding communities such as Chanhassen, Waconia and Norwood Young America, towns on the western fringes of the metro area. In 2005, it consolidated its nine community banks into a single institution with $1.1 billion in assets. Since then, the bank has nearly doubled in size, reaching $1.9 billion in assets last year.
The strategy, Hile said, has been to establish dominance in the southwestern suburbs, such as through the 2014 acquisition of Prior Lake State Bank. The bank also opened a new branch in Otsego, and in 2015 it added a commercial loan office in Edina.
“Our focus has been on local communities the entire time we have been in business,” said Hile, the first nonfamily member to lead the bank. “We helped the dentist set up his practice or get the grocer’s business going. Our job is to participate in our communities and build a better quality of life.”
But when civil rights activists and federal lawyers look at the bank’s footprint, they see discrimination. The bank’s territory reaches from the western suburbs to points north and south of Minneapolis, including communities with large minority populations such as Brooklyn Park, Brooklyn Center and Richfield.
But none of KleinBank’s 21 branches is located in a minority neighborhood, according to the lawsuit. In fact, its trade area resembles a letter C, with a large hole in the middle representing Minneapolis and St. Paul.
“When you look at their map, it’s a pretty classic redlining case,” Rice said. “Their [trade] area excludes almost the entire African-American and Latino community.”
Hile said race has nothing to do with the bank’s choice of locations. He said the issue is competition.
“We have one-tenth of 1 percent of the market share in Hennepin County,” Hile said. “And we have identified zero percent in Ramsey County. It is simply not where we are.”
Would KleinBank consider spending $1 million or so to open a new branch in Brooklyn Park or Richfield?
Hile said he wouldn’t rule it out, but the bank’s current expansion plans include replacing an aging branch in Chaska and adding a second location in Waconia, both projects in the western suburbs. He said the bank has not studied the idea of expanding into areas of Hennepin County or Ramsey County with large minority populations, but he said it would be challenging because those communities are already being served by big banks with far more resources.
“The small banks have two problems,” said Andrew Sandler, a Washington, D.C., lawyer who has frequently represented banks in legal disputes with the Justice Department. “Often there is limited opportunity for them to sell their mortgage products in the urban core. And they are often crowded out by the big banks, who are taking special measures to make sure they make their numbers [for minority borrowers] in the urban core.”
Shortage of credit options
But studies show there is a huge shortage of traditional banking options in the Twin Cities minority community. In a survey conducted in 2007, before the recession forced banks to shutter more than 200 locations across Minnesota, Minneapolis ranked last among the top 25 metros in terms of availability, according to the National Community Reinvestment Coalition.
In white parts of town, there was one branch for every 3,729 people, vs. one branch for every 13,473 people in minority areas, the survey showed. Altogether, less than 2 percent of bank branches in Minneapolis were located in minority neighborhoods, despite the fact that those areas accounted for nearly 7 percent of the population.
Minority residents also continue to face denial rates on mortgage loan applications that are twice those for comparable white borrowers in the Twin Cities, according to recent studies from the University of Minnesota. Myron Orfield, the law professor who led the work, said none of Minnesota’s banks are doing a good job at lending to the minority community.
“In the metro area, a black family that makes $167,000 a year is less likely to qualify for a prime loan than a white family that makes $40,000,” Orfield said. “Minneapolis has some of the biggest disparities in the approval rate between white and black people in the country. It is really terrible.”
In the lawsuit against KleinBank, federal officials did not accuse the bank of denying an unusual number of loan applications by minority borrowers, an allegation central to many discrimination lawsuits against financial institutions. But the suit noted that KleinBank received just 62 mortgage loan applications from residents in minority areas from 2010 to 2015, or about 1 percent of the total of 5,837.
Hile said those numbers simply reflect the demographics of the bank’s trade area.
“The inference is that we discriminate — and we don’t discriminate,” Hile said. “It is our position that the bank has and continues to serve the needs of all of the communities that are in our [trade] area. And that has been validated by numerous regulatory exams.”