The U.S. Department of Justice (DOJ) recently settled fair lending lawsuits against two mortgage lenders. Both actions involved DOJ attempts to use disparate impact evidence to establish that a lender engaged in a “pattern or practice” of intentional discrimination based on race or national origin.

Both lawsuits challenged pricing practices in the form of “overages” or “yield spread premiums” (YSPs) that allegedly gave the lenders' employees or third-party wholesale brokers discretion to set interest rates without regard to buyers’ creditworthiness, and provided compensation to them for higher rates. (Overages or YSPs are nonrisk-related finance charges added by employees or wholesale brokers, respectively, to the lender’s interest rate.)

One complaint against a California-based nonbank lender alleged that the lender gave its wholesale mortgage brokers discretion to set total broker compensation that included direct fees paid by the borrower and YSPs and did not strictly enforce its caps on total broker fees or establish objective guidelines to be followed by brokers in setting fees. The other complaint against a bank in the Washington, D.C., area alleged that the bank gave its wholesale brokers similar discretion and also gave its employees discretion to charge overages. While the bank did cap the amount of total broker compensation and employee overages, it was alleged not to have established objective criteria or adequately monitored the exercise of pricing discretion by its employees or brokers.

Both complaints alleged that “statistically significant” disparities existed between the pricing of loans made to African-American or Hispanic borrowers and white borrowers. The DOJ alleged that the higher prices charged to African-American and Hispanic borrowers stemmed from the lenders’ discretionary pricing practices.

In the complaints, the DOJ asserted various theories for its claims that the lenders had discriminated against borrowers on the basis of race or national origin, violating the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). The complaints charged that the lenders’ policies and practices constituted “[a] pattern or practice of resistance to the full enjoyment of rights secured by the [FHA] and the [ECOA].”

The DOJ also charged that the lenders’ policies and practices “were intentional, willful, or implemented with reckless disregard for the rights of African-American and Hispanic borrowers.” It appears that the agency based its allegation of intentional discrimination on the lenders’ alleged knowledge of customers’ race and national origin through Home Mortgage Disclosure Act data collected by a lender’s employees or its wholesale brokers.

The settlements require the bank’s successor and the nonbank lender to pay, respectively, $2.85 million and $3 million in compensation to aggrieved borrowers. The nonbank lender is enjoined from engaging in any act or practice that discriminates on the basis of race or national origin in violation of the FHA or ECOA.

The nonbank lender is also required to implement a loan pricing policy that contains objective standards for the assessment of broker fees and requires written documentation of such fees to be kept in each loan file, a prescribed notice of non-discrimination to be posted in all locations where the lender receives applications, a prescribed disclosure to be provided to applicants by brokers, and compliance by brokers with the foregoing pricing policy requirements.

Other requirements include:

  • Maintaining a monitoring program that reviews compensation received by wholesale brokers on a semi-annual basis for statistically significant disparities between African-American or Hispanic and white borrowers and taking prompt corrective action to address disparities
  • Providing fair lending training to management and employees

This action appears to be part of a continuing DOJ trend to conflate disparate impact and disparate treatment theories of FHA or ECOA liability. The DOJ’s decision not to rely exclusively on disparate impact to frame its fair lending cases could reflect its concern over the continued survival of the disparate impact theory.

Although it is expected that a settlement in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. will deny the U.S. Supreme Court its second opportunity to decide whether disparate impact claims are available under the FHA, that issue has also been raised in another case pending in federal district court in Washington, D.C. A decision disallowing the use of disparate impact claims under the FHA would call into question the availability of such claims under the ECOA.

The action against the California nonbank lender was referred to DOJ by the Federal Trade Commission, and the action against the bank was referred to DOJ by the Office of the Comptroller of the Currency.

To help consumer credit providers prepare for examinations and to prevent, manage, and defend against the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of Consumer Financial Protection Bureau examinations), litigators who defend against claims of fair lending violations, and attorneys who understand the statistical analyses that underlie fair lending assessments and discrimination claims.

Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm’s Consumer Financial Services Group, which is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or Heather S. Klein at 215.864.8732 or kleinh@ballardspahr.com.

 


 

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