The Nation's Housing
To protect minorities from higher loan fees, policy takes aim at the top
A new Obama administration policy that gets tough on home-mortgage discrimination is drawing kudos from consumer advocates, along with expressions of serious concern from lawyers who represent lenders and brokers.
In a settlement last month with two subsidiaries of ailing insurance giant American International Group, the Justice Department took aim at one of the most controversial practices of the housing boom years: National subprime mortgage lenders originated billions of dollars in high-interest-rate loans through local brokers who sometimes hit black and other minority applicants with excessive loan charges.
Mortgages extended to African Americans often carried higher fees than those to white subprime applicants -- even when the borrowers' credit profiles and other factors were about the same. But did these fee disparities make the lenders who purchased the loans from local brokers vulnerable to legal attack?
Weren't the higher fees solely the result of predatory pricing by individual brokers operating independently of their wholesale lenders? If a broker charged African Americans higher fees than whites, wasn't this violation of fair-lending laws on the broker's shoulders?
The Obama administration gave a resounding answer to that question: No. The consent order requires AIG's subsidiaries to pay $6.1 million to about 2,500 African American borrowers, or $2,300 on average for each overcharged loan.
The companies are also required to spend at least $1 million on consumer financial education programs. As part of the settlement, none of the firms admitted wrongdoing. AIG Federal Savings Bank and Wilmington Finance no longer are involved in the wholesale mortgage market. AIG took a $182 billion bailout from the federal government in 2008 and is reorganizing its business activities. No individual mortgage brokers were cited in the case.
The core message here, according to Justice Department officials, is that lenders who use independent brokers to originate mortgages cannot ignore what those brokers are doing to their minority customers. They will be held responsible for civil rights violations because they should have been monitoring their broker networks for signs of discriminatory pricing, which should be detectable by examining loan packages and performing statistical analyses.
Thomas E. Perez, an assistant attorney general, said: "Discriminatory practices by lenders, brokers and other players contributed to our nation's housing crisis and economic meltdown. Lenders who looked the other way and ignored the discriminatory practices of brokers must be held accountable."
Perez warned that many other lenders who use broker networks could also be vulnerable to legal actions.
Community groups and civil rights advocates hailed the settlement as a huge step forward. "It's a new day for borrowers," said David Berenbaum, chief program officer for the National Community Reinvestment Coalition. "Borrowers should see fewer backdoor pricing abuses" -- especially the bloated fees, interest rates and unequal underwriting standards that were commonplace during the housing boom years.
Some mortgage industry groups and lawyers who specialize in financial issues disagree. They argue that holding giant wholesale lenders responsible for illegal acts they did not directly commit not only is unfair but will do long-term harm to all borrowers.
Roy DeLoach, chief executive of the National Association of Mortgage Brokers, said: "We absolutely oppose discrimination in any form. But we think the government's target should be the persons who actually do the discriminating" -- in this case, local brokers, not lenders who acquired the loans with no knowledge of the larger fees.
DeLoach argues that the administration's approach will discourage some lenders from dealing with brokers in general and leave fewer brokers active in the market, thereby reducing competition in the marketplace, especially in areas with significant minority populations.
"There will be less choice for borrowers," he said. "That inevitably means higher rates and worse terms." DeLoach predicted that only a handful of big banks will dominate the mortgage business. Paul F. Hancock, a lawyer who served for 20 years in the Justice Department's civil rights division and was a deputy attorney general in Florida, said the AIG settlement "is really stretching the law, maybe even going beyond the law" by holding lenders responsible.
Hancock, who specializes in advising financial institutions, added that there is no case law supporting what he called the administration's "aggressive" position. But he said it may prevail because "nobody wants to fight the government."
Look for more fair lending settlements, more financial restitution and much closer supervision of loan officers -- whether they are on lenders' staffs or are independent brokers -- to ensure that every applicant gets equal treatment.