Insights

Loan officer compensation rules have greatly reduced discretionary pricing in mortgage interest rates and fees, but at the U.S. Department of Justice, fair lending enforcement actions are hits that just keep on coming. In late September, the Justice Department settled three cases involving alleged discrimination against African-American and Hispanic borrowers, with costs to these lenders totaling more than $6.5 million. All three cases involved claims that the banks gave their brokers too much leeway in determining fees and rates paid by borrowers. Let's take a look at the allegations and settlements.

Southport Bank

On September 26, 2013, the Justice Department announced its settlement agreement with Southport Bank of Kenosha, Wis., resolving claims that the bank engaged in a pattern of lending discrimination. The complaint alleged that the bank violated the Fair Housing Act and the Equal Credit Opportunity Act by allowing its wholesale mortgage brokers to charge hundreds of African-American and Hispanic borrowers higher rates and fees for home loans than white borrowers. As a result of this alleged practice, African-American and Hispanic borrowers paid, on average, thousands of dollars more for a loan than a similar white borrower.

Justice brought the case on a referral from the Federal Deposit Insurance Corporation. The charges were based on loans the bank made in 2007 and 2008. Brokers were allowed to charge yield-spread premiums and discretionary fees.

As part of the consent agreement, Southport has been ordered to pay $687,000 to compensate affected individuals for monetary damages. Southport no longer originates home loans, but if it chooses to do so in the future, it must give notice to its federal regulator and implement policies to prevent and monitor potential fair lending violations.

Plaza Home Mortgage

The Justice Department announced another settlement on September 27, this time with Plaza Home Mortgage of San Diego. The complaint alleged that between 2006 and 2010, Plaza charged thousands of African-American and Hispanic borrowers higher fees than white borrowers, violating the FHA and ECOA. Plaza allowed its brokers to charge fees in excess of its stated fee caps more frequently for African-American and Hispanic borrowers than for white borrowers. This resulted in African-American borrowers being charged broker fees that were 28 to 94 basis points higher than white borrowers. During this period, African-American borrowers were 1.6 times more likely to be charged fees in excess of Plaza's caps than white borrowers. As a result of this alleged practice, African-American and Hispanic borrowers paid, on average, hundreds of dollars more for a loan.

The settlement required Plaza to pay $3 million to affected borrowers, establish race- and national-origin-neutral standards for the assessment of broker fees, monitor loans for potential disparities, conduct fair lending training, and continue to operate a community enrichment program designed to address the lack of affordable housing and lending products in minority and underserved communities.

Chevy Chase Bank

Just three days after announcing the agreement with Plaza Home Mortgage, the Justice Department announced another agreement with now defunct Chevy Chase Bank resolving allegations the bank engaged in a pattern of discrimination against African-American and Hispanic borrowers between 2006 and 2009. The complaint alleged the bank charged higher prices on mortgage loans made to qualified African-American and Hispanic borrowers than white borrowers, violating the FHA and ECOA. The complaint alleged that these higher prices were the result of the bank's employees having the discretion to vary a loan's interest rate or other fees, and were not based on the borrower's risk.

Capital One, which purchased Chevy Chase Bank in 2009, must pay $2.85 million to approximately 3,100 African-American and Hispanic victims of discrimination, or roughly $920 per person.

Ongoing Fair Lending Concerns

These cases are each based on conduct pre-dating the loan officer compensation rules. It is tempting to hope that discretionary pricing in mortgages has become a thing of the past, but that may be magical thinking. It is important to recognize that eliminating loan officer compensation based on discretionary pricing does not necessarily end fair lending risk with mortgage pricing.

Today, two common practices can still create fair lending risk. One practice is permitting discretionary lender credits. Lender credits at settlement are used to defray a borrower's closing costs and are a popular method of selling the loan product to an undecided consumer. The concern arises if minority borrowers receive these credits less frequently, or in smaller dollar amounts, than nonminority borrowers.

A second concern is allowing brokers or employees to have different compensation packages that are reflected in "customized rate sheets." These differences can result in different loan prices or discretionary lender credits to borrowers. This means establishing reasonable limits for discretion, and if exceptions occur, they must be tracked, analyzed, explained, and reported. Otherwise, the Justice Department hits will just keep on coming.

L. Jean Noonan is a partner in Hudson Cook's Washington, D.C., office of Hudson Cook, LLP. Jean can be reached at 202-327-9700 or by email at jnoonan@hudco.com.

Nicholas J. Drymalski is a paralegal in the Washington, D.C., office of Hudson Cook, LLP. Nick can be reached at 202-327-9701 or by email at ndrymalski@hudco.com.