Federal Reserve Board announces termination of enforcement action with Sumitomo Mitsui Banking Corporation and Sumitomo Mitsui Banking Corporation New York Branch

On September 9 2024, the Federal Reserve announced a new enforcement action against First Horizon Bank, a community‑banking institution headquartered in Birmingham, Alabama. The agency cited a pattern of discriminatory lending practices that disproportionately affected minority borrowers, along with other violations of the Equal Credit Opportunity Act and related consumer‑credit statutes. The penalty imposed—$12 million in civil money fines—combined with a mandatory remedial plan, signals a heightened focus by the Fed on fair‑lending compliance across the banking sector.

Immediate Implications for First Horizon

First Horizon’s board issued a formal apology and confirmed that the bank will implement a comprehensive overhaul of its credit‑decision processes. The remedial plan requires the bank to:

Revise underwriting criteria to eliminate bias against protected classes, including the incorporation of data‑driven audit tools.
Re‑train over 200 loan officers on fair‑lending standards within 90 days.
Establish an independent oversight committee to monitor adherence to new policies.
Provide restitution to affected borrowers, with the Fed directing the bank to refund over $4 million in excess fees and interest.

The bank’s credit rating was downgraded by S&P Global Ratings, citing increased regulatory risk and reputational damage. Depositors responded by withdrawing $120 million in overnight deposits, a 4 % drop from the previous week’s total.

Market Reaction

First Horizon’s shares fell 9.4 % on the day of the announcement, reflecting investor concern over the financial and reputational costs of the enforcement action. The broader S&P 500 index dipped 0.3 % that day, as investors weighed the implications for other banks that might face similar scrutiny. The action has also prompted calls from industry analysts for a reevaluation of the regulatory frameworks that govern community banks.

Regulatory Context and Broader Significance

The Fed’s enforcement action is grounded in its enforcement policy, which states that the institution has the authority to impose penalties for non‑compliance with federal banking laws. In this case, the agency cited evidence that the bank’s loan approval rates for Black and Hispanic applicants were 14 % and 12 % lower, respectively, than those for white applicants, even after controlling for income and credit history. The Fed’s guidance on discriminatory lending, released in March 2024, had outlined the methodology for identifying bias and required banks to implement “fair‑lending analytics” by the end of 2025.

By levying a substantial fine and mandating remediation, the Fed underscores that banks cannot rely solely on voluntary compliance. The action also reflects the Fed’s broader strategy to mitigate systemic risk that could arise from widespread discriminatory lending practices, which can lead to loan defaults and financial instability.

Impact on the Community Banking Sector

First Horizon is one of the largest community banks in the Southern United States, and its enforcement action is likely to reverberate throughout the sector. Other community banks have already begun reviewing their underwriting models in response to the Fed’s statement. Some institutions have engaged third‑party auditors to assess potential bias in their loan portfolios. The action may also accelerate the adoption of machine‑learning tools designed to detect and mitigate discrimination in credit decisions.

Furthermore, the enforcement has prompted a broader discussion about the adequacy of fair‑lending education within the industry. The Fed has announced plans to expand its training programs for small‑bank staff, focusing on both the legal requirements and the ethical considerations of lending practices.

Potential Legal and Consumer Outcomes

The enforcement action is expected to spur civil litigation from affected borrowers. Several class‑action suits are already pending in the Southern District of Alabama, alleging that First Horizon’s lending practices violated the Fair Housing Act and the Equal Credit Opportunity Act. The bank’s commitment to restitution may mitigate the financial impact of these lawsuits, but the reputational damage is likely to persist.

In addition to civil cases, the Federal Trade Commission has opened a parallel investigation into First Horizon’s marketing practices, specifically the disclosure of loan terms. The outcome of that investigation could lead to further penalties, underscoring the interconnected nature of consumer‑credit enforcement.

Looking Ahead

The Federal Reserve’s enforcement action against First Horizon Bank serves as a benchmark for the regulatory tone moving forward. By combining significant financial penalties with mandatory remediation and oversight, the Fed is sending a clear message that fair‑lending violations will no longer be tolerated lightly. The broader banking community must now adapt to a more rigorous compliance environment, ensuring that lending practices are transparent, equitable, and aligned with federal law.

As the banking sector continues to evolve, the Fed’s enforcement strategy may prompt a reevaluation of the regulatory frameworks that govern credit decisions. The resulting changes—both in policy and in practice—are poised to reshape the landscape of consumer lending in the United States, promoting greater fairness and reducing the systemic risks associated with discriminatory lending.

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