AIG settlement comes down hard on discriminatory fees
WASHINGTON — A new Obama administration get-tough policy on home-mortgage discrimination is drawing kudos from consumer advocates — and expressions of 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: excessive loan charges that local brokers added to high-interest-rate loans for some minority applicants.
Mortgages extended to African-Americans, for example, often carried higher fees than those paid by white subprime applicants — even when their credit profiles and other factors were about the same. The question is whether the national subprime mortgage lenders who bought the loans from local brokers can be the target of legal attack.
Weren't the individual brokers operating independently of their wholesale lenders? And 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 answered with a resounding no. The consent order requires AIG's subsidiaries to pay $6.1 million to about 2,500 African-American borrowers, or an average of $2,300 in cash restitution for overcharges per loan.
The firms also must spend at least $1 million on consumer financial education programs. 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 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: Lenders who use independent brokers to originate mortgages cannot ignore how those brokers treat minority customers. The lenders will be held responsible for civil rights violations because they should be monitoring their broker networks for signs of discriminatory pricing — which should be detectable by examining loan packages and performing statistical analyses.
"Discriminatory practices by lenders, brokers and other players contributed to our nation's housing crisis and economic meltdown," said Thomas E. Perez, an assistant attorney general. "Lenders who looked the other way and ignored the discriminatory practices of brokers must be held accountable."
Community groups and civil rights advocates hailed the settlement. "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 bloated fees, interest rates and unequal underwriting standards that were commonplace in the housing boom years.
But some mortgage industry groups and lawyers who specialize in financial issues disagree. They say holding giant wholesale lenders responsible for illegal acts they themselves did not commit is unfair and will do long-term harm to all borrowers.
"We absolutely oppose discrimination in any form," said Roy DeLoach, CEO of the National Association of Mortgage Brokers. "But we think the government's target should be the persons who actually do the discriminating."
DeLoach argues that the administration's approach will discourage some lenders from dealing with brokers in general, thereby reducing competition in the marketplace, especially in areas with significant minority populations. With fewer brokers active in the market, there will be fewer choices for borrowers, he said. "That inevitably means higher rates and worse terms."
Paul F. Hancock, a partner with the law firm K&L Gates who served for 20 years in the Justice Department's Civil Rights Division and was a deputy attorney general in Florida, says the AIG settlement "is really stretching the law, maybe even going beyond the law" by holding lenders responsible for the actions of independent brokers.
Hancock, who specializes in advising financial institutions, says no case law supports the administration's "aggressive" position. But it may prevail because "nobody wants to fight the government."
Regardless of what happens, consumers can expect more fair lending settlements and closer supervision of loan officers to ensure every mortgage applicant gets equal treatment.
Ken Harney can be reached at [email protected]