The U.S. Justice Department has accused Chaska-based KleinBank of redlining, the illegal practice of denying mortgage loans to minority residents.

In a federal lawsuit filed late Friday, lawyers from the department's civil rights division said KleinBank engaged in discrimination in Minneapolis and St. Paul by failing to market its services and open bank branches in areas dominated by minorities. KleinBank, which operates 21 branches in mostly outer-ring suburbs of the Twin Cities, is one of Minnesota's largest community banks.

"KleinBank's discriminatory practices … have been intentional and willful, and implemented with reckless disregard for the rights of individuals on the basis of their race and/or national origin," the complaint said.

KleinBank officials denied the charges, saying they have been cooperating with Justice Department officials for more than a year.

"The government's claim of 'redlining' has absolutely no basis in fact," Doug Hile, KleinBank president and CEO, said in a written statement. "To the contrary, KleinBank has an established history of responding to all credit requests with a commitment to fairness and equal opportunity."

The lawsuit is the first of its kind involving a Minnesota-based bank, said Joe Witt, president and chief executive of the Minnesota Bankers Association. Witt said he was surprised by the government's argument that KleinBank engaged in discrimination by not opening branches in parts of town in which it has never done business, such as St. Paul.

"I can tell you this — every bank in the country will be watching to see if the courts agree that the federal government can require that type of change," Witt said. "That seems to be a pretty significant departure" from other Justice Department cases.

According to the lawsuit, a statistical analysis of KleinBank's loan applications revealed that the bank served residents of majority-white census tracts "to a significantly greater extent" than residents in predominantly minority areas.

Of 5,837 residential loans analyzed by the government, just 62 applications — or slightly more than 1 percent of residential loans — involved property in tracts where minority members accounted for the majority of residents. By comparison, other lenders generated more than 5 percent of residential loan applications in minority areas, the lawsuit said.

In order to avoid business in minority communities, KleinBank created a "horseshoe-shaped" market that includes the majority-white suburbs and avoids areas in the Twin Cities "that have a higher proportion of minority populations," the lawsuit said. The lawsuit noted that KleinBank's market excludes 78 of the 97 tracts with predominantly minority populations in the metropolitan area.

Hile said the government's argument that KleinBank has a proactive duty to expand into Minneapolis and St. Paul by opening new branches in minority neighborhoods is a "baseless and unprecedented reach by the government."

Hile said Minneapolis and St. Paul "are not part of KleinBank's market, and we have virtually no business there. These are highly competitive markets, and they are comprehensively served by well-established financial institutions with numerous branches and many years of history."

The federal lawsuit comes despite reviews by the Federal Deposit Insurance Corp. that have consistently given KleinBank "satisfactory" rankings for its lending practices in economically disadvantaged areas.

"Examiners did not identify any evidence of discriminatory or other illegal credit practices," the FDIC noted in its most recent review, which covered April 2013 to November 2015.

Myron Orfield, a law professor at the U who has studied redlining, said the FDIC's reviews have proved unreliable in gauging discrimination.

"Most of these banks that get sued [for discrimination] and pay big settlements have these kinds of satisfactory rankings," Orfield said.

As an example, Orfield cited Wells Fargo, the nation's largest residential home mortgage originator, which received high ratings from the FDIC before paying $184 million in 2012 to settle federal claims of discrimination against African-American and Hispanic borrowers.

Altogether, the Justice Department obtained more than $1.4 billion in settlements through similar actions against lenders from 2010 to 2014, according to the department's most recent report to Congress. The department opened 18 lending investigations in 2015 and filed eight lawsuits over allegedly discriminatory practices.

Founded in 1907, KleinBank is owned by Klein Financial, which consolidated nine community banks across Minnesota into a single financial institution in 2005. KleinBank listed assets of $1.8 billion in 2016.

Attorneys from the Justice Department have asked for an order prohibiting further discrimination at KleinBank and are seeking unspecified monetary damages for victims and a civil penalty against the bank "in order to vindicate the public interest."

"Redlining produces an unequal and unlevel playing field for borrowers in minority neighborhoods," said Deputy Assistant Attorney General Vanita Gupta in a statement announcing the lawsuit. "Cases like this one demonstrate the Justice Department's strong commitment to hold banks accountable for continuing and perpetuating historic trends of inequality in residential mortgage lending."

Jeffrey Meitrodt • 612-673-4132

Stephen Montemayor • 612-673-1755