Insights

Fair lending continues to be a high priority of the Obama Administration. To that end, in December the U.S. Department of Justice filed its largest residential fair lending settlement in history to resolve allegations that Countrywide Financial Corporation and its subsidiaries engaged in a widespread pattern or practice of discrimination against qualified African-American and Latino borrowers in their mortgage lending from 2004 through 2008. The settlement is but one part of President Obama’s Financial Fraud Enforcement Task Force, established to investigate and prosecute financial crimes.

The settlement provides $335 million in compensation for victims of Countrywide’s discrimination during a period when Countrywide originated millions of residential mortgage loans as one of the nation’s largest single-family mortgage lenders. This is the first time that the DOJ has alleged and obtained relief for borrowers steered into loans based on race or national origin, a practice that systematically placed borrowers of color into subprime mortgage loan products while placing non-Latino white borrowers with similar creditworthiness in prime loans. By steering borrowers into subprime loans from 2004 to 2007, the DOJ alleged that Countrywide harmed those qualified borrowers, as subprime loans generally carried higher-cost terms, such as prepayment penalties and exploding adjustable interest rates that increased suddenly after two or three years, making the payments unaffordable and leaving the borrowers at a much higher risk of foreclosure.

The DOJ alleged that Countrywide discriminated by charging more than 200,000 African-American and Hispanic borrowers higher fees and interest rates than non-Hispanic white borrowers in both its retail and wholesale lending. The complaint alleges that these borrowers were charged higher fees and interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk. Countrywide also allegedly discriminated by steering thousands of African-American and Hispanic borrowers into subprime mortgages when non-Hispanic white borrowers with similar credit profiles received prime loans. All the impacted applicants qualified for Countrywide mortgage loans according to Countrywide’s own underwriting criteria.

The settlement resolved the United States’ pricing and steering claims against Countrywide for its discrimination against African Americans and Hispanics. According to the DOJ, African-American and Latino borrowers paid more than non-Latino white borrowers, not based on borrower risk, but because of their race or national origin. Countrywide’s business practice allowed its loan officers and mortgage brokers to vary a loan’s interest rate and other fees from its established prices based on the borrower’s objective credit-related factors. This subjective and unguided pricing discretion resulted in African American and Latino borrowers paying more. The complaint further alleges that Countrywide knew the fees and interest rates it charged discriminated against African-American and Latino borrowers, but failed to impose meaningful limits or guidelines to stop it.

According to the DOJ, as a result of Countrywide’s policies and practices, qualified African-American and Latino borrowers obtained subprime loans rather than prime loans even when similarly-qualified non-Latino white borrowers received prime loans. The discriminatory placement of borrowers in subprime loans, also known as “steering,” occurred because Countrywide’s business practices allowed mortgage brokers and employees to place a loan applicant in a subprime loan even when the applicant qualified for a prime loan. In addition, Countrywide gave mortgage brokers discretion to request exceptions to the underwriting guidelines, and Countrywide’s employees had discretion to grant these exceptions.

The settlement also resolves the DOJ’s claim that Countrywide violated the Equal Credit Opportunity Act by discriminating on the basis of marital status against non-applicant spouses of borrowers by encouraging them to sign away their home ownership rights. The ECOA allows married individuals to apply for credit either in their own name or jointly with their spouse, even when the property is owned by both spouses. For applications made by married individuals applying solely in their own name between 2004 and 2008, Countrywide encouraged non-applicant spouses to sign quitclaim deeds or other documents transferring their legal rights and interests in jointly-held property to the borrowing spouse. Non-applicant spouses who executed a quitclaim deed risk substantial uncertainty and financial loss by losing all their rights and interests in the property securing the loan.

Catherine M. Brennan is a partner in the Maryland office of Hudson Cook, LLP. Cathy can be reached at 410-865-5404 or by email at cbrennan@hudco.com.