The Department of Justice and The Consumer Financial Protection Bureau claim Hudson City Savings Bank avoided giving credit access to those living in predominantly minority neighborhoods -- a practice known as "redlining."
"We allege that Hudson City's redlining practices illegally cut off opportunities for consumers in predominantly black and Hispanic neighborhoods to get a mortgage and achieve the dream of homeownership," said CFPB Director Richard Cordray, in a press release.
Related: New home sales highest since 2008
From 2009 to 2013, the bank, which is a subsidiary of Hudson City Bancorp (AZZEF), allegedly avoided serving residents and opening branches in neighborhoods that were mostly black and Hispanic.
Federal law prohibits credit discrimination based on an applicant's race, color, sex, religion and national origin among other factors.
According to the complaint, the bank launched a branch expansion from 2004 to 2010, but 94% of the new branches were not located in mostly black and Hispanic neighborhoods.
Hudson City Savings Bank, which has 135 banking offices in the New York metropolitan area, said it "disagrees with the statistical analysis of its loans," but agreed to offer $25 million in subsidies.
"Hudson City historically relied heavily on purchases of loans from other originators to minority borrowers in the very census tracts that form the basis of the allegations, and kept such loans on its balance sheet in order to fulfill its Community Reinvestment Act and fair lending responsibilities," the company said in a release.
The bank did not immediately respond for comment.
Under the agreement, the bank will pay $25 million in loan subsidies to offer more affordable home loans to borrowers in minority neighborhoods in New Jersey, New York, Connecticut and Pennsylvania.
According to the CFPB, this is the largest redlining settlement to provide direct subsidies.
The bank also faces a $5.5 million penalty and will fund $2.25 million in targeted advertising and community outreach programs.
The settlement still needs court approval.
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CNNMoney (New York) September 24, 2015: 6:18 PM ET
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