US DOJ Settles Lending Discrimination Case

Posted on December 10, 2010 by Fred Rivera

On December 8, 2010, the Justice Department's Civil Rights Division announced in a press release that it had reached a $2 million settlement with Texas-based PrimeLending to resolve allegations that the lender engaged in a pattern or practice of discrimination against African-American borrowers between 2006 and 2009.  The Complaint includes allegations that the lender's policy allowing loan officers to set "overages" on loans had a disparate impact on African-American borrowers.  The settlement, filed in conjunction with a Complaint in the U.S. District Court for the Northern District of Texas, was brought under the Fair Housing Act and Equal Credit Opportunity Act. 

According to the government's Complaint, between 2006 and 2009, PrimeLending charged African-American borrowers higher annual percentage rates of interest for prime fixed-rate home loans and for home loans guaranteed by the Federal Housing Administration and Department of Veterans Affairs than it charged to similarly-situated white borrowers.  The government's complaint relies, in part, on the disparate impact theory.  According to the government, the lender's policy allowing its employees wide discretion to increase their commissions by adding “overages” to loans that increased the borrowers' interest rates had a "disparate impact" on African-American borrowers.
 

In addition to paying $2 million to the victims of discrimination, the settlement incorporates provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations recently enacted by the Federal Reserve that restrict loan officer compensation based on the terms or conditions of a particular transaction.  The Justice Department's announcement stated that PrimeLending had already began to implement policies to prevent discrimination, including requiring employees to provide legitimate non-discriminatory reasons in order to adjust loan prices.    

Over the past year, the Justice Department has stated its intent to increase efforts to combat lending discrimination.  This is the second lending discrimination complaint and settlement filed by the Department in 2010.   The theory of the case--disparate impact caused by discretionary pricing--has been used by DOJ for over a decade, and likely will continue.  For example, in 1996, the Justice Department reached a $4 million settlement with Fleet Mortgage Corp. in connection with allegations that the lender's policy of granting loan officers wide discretion to charge overages resulted in charging African-American and Hispanic borrowers higher prices for home mortgage loans than comparably qualified whites.

(Read more at Los Angeles Times and Wall Street Journal.

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DOJ Announces Results of Financial Fraud Task Force's "Operation Broken Trust"

Posted on December 7, 2010 by Fred Rivera

On December 6, 2010, Attorney General Eric Holder announced the results of "Operation Broken Trust," a nationwide law enforcement effort formed by the Financial Fraud Enforcement Task Force to investigate investment fraud.  Holder said in a press release:

With this operation, the Financial Fraud Enforcement Task Force is sending a strong message.   To the public: be alert for these frauds, take appropriate measures to protect yourself, and report such schemes to proper authorities when they occur.  And to anyone operating or attempting to operate an investment scam: cheating investors out of their earnings and savings is no longer a safe business plan - we will use every tool at our disposal to find you, to stop you, and to bring you to justice.

Holder was joined at the press conference by representatives of the other federal agencies comprising the task force, including the SEC, U.S. Postal Inspection Service, and IRS. "Operation Broken Trust," formed in August of this year, resulted in 60 civil enforcement actions and 231 criminal cases.  The effort targeting a total of 343 criminal defendants and 189 civil defendants, and involved more than $10 billion in estimated losses, according to the DOJ press release. 

"Operation Broken Trust" is part of the federal governments effort to marshal the efforts of agencies involved in the financial market through the Financial Fraud Enforcement Task Force.  The task force's civil and criminal cases brought to date cover a broad spectrum of the financial markets, and involve alleged violations ranging from securities fraud and insider trading to mortgage fraud and lending discrimination.

Read more about this topic at:  Law360; The Washington Post; and The Los Angeles Times.

 

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SEC Defers Opening Whistleblower Office Required By Dodd-Frank

Posted on December 3, 2010 by Fred Rivera

On December 2, 2010, the U.S. Securities and Exchange Commission announced that "budget uncertainty" has caused it to postpone setting up an office to handle whistleblower complaints.  A new SEC whistleblower office is required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Once created, the new SEC whistleblower office will be responsible for receiving and vetting tips received through a new bounty program created in Dodd-Frank.  Under that program, whistleblowers who report to the SEC “original information” about securities law violations can earn 10% to 30% of monetary sanction of more than $1 million in a successful enforcement action brought by the agency.

The bounty program has created concern in the business community that it may motivate disgruntled employees and others to file frivolous allegations, resulting in companies needlessly expending resources in investigation and defense costs.  (Read more about Dodd-Frank's bounty provisions in the November 2010 Corporate Counsel:  "When the Whistle Blows, Dodd-Frank's bounty provisions has GCs staying up nights.")

Existing staff within the Division of Enforcement will on an interim basis handle the tasks that would have been assigned to a formal whistleblower office within the agency, according to the SEC announcement. The SEC said on its website that it had similarly deferred creating four other offices required by Dodd-Frank: an office to oversee credit ratings; a new investor advisory committee; an office of investor advocate; and an office of women and minority inclusion.

The SEC said it would have more information on the implementation dates for the deferred offices after Congress finalized the 2011 budget.  The Dodd-Frank law includes additional funding for the SEC to handle the tasks assigned to the agency; however, disputes on Capital Hill about budget issues has created uncertainty about the amount of funding that the SEC and other federal agencies will actually receive to implement Dodd-Frank.  (Read more about financial reform budget issues at Law360 Financial Services Law:  GOP May Slow Down Financial Reform.)

Dodd-Frank charges the SEC with a substantial rewrite of the financial regulatory framework, including rewriting 105 rules, creating five new divisions, and completing 20 studies.  The agency  has until July 2011 to complete much of its rewrite work.

(Read more on this topic at Law360 and The Wall Street Journal.)

 

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US DOJ Investigating Lending Discrimination Against Native Americans

Posted on December 1, 2010 by Fred Rivera

In a November 30, 2010 speech at the 2010 District of New Mexico Tribal Consultation conference, Thomas Perez , the Assistant Attorney General for the Civil Rights Division, confirmed that his Division is pursuing "several investigations" into potential lending discrimination against Native Americans.

[W]e know that minority communities were hit particularly hard in the foreclosure crisis, and we have created a Fair Lending unit to address any past and future credit discrimination.  Access to credit is the foundation of wealth in our nation, and in order to have real equal opportunity, individuals must have equal access to credit.  Particularly in communities where unemployment rates were already high pre-recession, as with many Native communities, it is critical that we remain vigilant in enforcing fair housing and fair lending laws to ensure they do not suffer even further. 

Several years ago, the Civil Rights Division settled a lending case that alleged that a lender that operated in parts of the West and Southwest had refused to make loans to people who lived on Indian reservations.  Age-old tactics like this unfortunately remain all too common, and we remain committed to aggressive enforcement – we currently have several investigations into potential lending discrimination against Native Americans based on the fact that they live in Indian country.  Fair and equal access to credit is fundamental in providing economic opportunities to those in Indian Country and elsewhere, and we will not tolerate lenders that restrict access to consumer credit on equal terms because of a person's national origin and where they live.  

Perez did not provide further details about the on-going lending discrimination investigations. AAG Perez's full speech is available here.

The Justice Department has consistently announced that prosecuting lending discrimination is a top priority for the Civil Rights Division.   While there may be several "on going" investigations, to date few have resulted in litigation or public settlement agreements.  According to the Civil Rights Division's list of significant cases, the Division has brought only one lending discrimination matter in 2010--an April 2010 settlement between AIG subsidiaries and the Financial Fraud Enforcement Task Force, of which the Department is a member.

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