Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

On December 21, 2011 the U.S. Department of Justice announced it had reached a $335 million settlement with Countrywide, now owned by Bank of America, to resolve allegations of lending discrimination.  The settlement resolves claims that Countrywide charged Hispanics and African-American borrowers higher prices for credit compared to similarly situated non-Hispanic and white borrowers.  The Justice Department announced that the settlement is the largest fair lending settlement in the Department's history. 

The settlement, which is subject to court approval, was filed today in the U.S. District Court for the Central District of California in conjunction with the department’s complaint which alleges 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.  

According to the DOJ press release, the settlement also resolves allegations 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. 

For the last three years, the Civil Rights Division has warned of its stepped-up enforcement efforts in the fair lending arena.  While case filings were slow to come, the Countrywide settlement, along with recent fair lending activity out of the Division and by members of the interagency Financial Fraud Enforcement Task Force, suggests that government enforcement of fair lending laws may continue to impact the consumer finance industry during 2012.

Read the DOJ's Press Release here; the Complaint here; and the proposed Consent Order here. 

Read MarketWatch's article here and Bloomberg's article here.

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On May 5, 2011, the U.S. Department of Justice announced a $3.6 million settlement with Citizens Republic Bankcorp Inc. (CRBC) to resolve allegations that Republic Bank, acquired by Citizens in 2006,  refused to lend in predominately minority areas of Detroit in violation of the Fair Housing Act and the Equal Credit Opportunity Act.  The Complaint alleges that CRBC engaged in "redlining" by serving the credit needs of the residents of predominantly white neighborhoods in the Detroit metropolitan area to a significantly greater extent than in majority African-American neighborhoods. 

The settlement, which is subject to court approval, includes a $1.625 million neighborhood stabilization fund that, in a partnership with the city of Detroit, will be used to provide existing homeowners with grants fund exterior improvements; $1.5 million in a special financing program to increase the amount of credit the banks extend to majority African-American areas in Wayne County; and a $500,000 fund for outreach to potential customers, promotion of their products and services, and consumer financial education.  The bank also will open a loan production office in a majority African-American area in Detroit and conduct fair lending training for its employees.

Kristine Brenner, director of investor relations for Citizens Bank, said the lawsuit has no merit and the bank reached a settlement to avoid costly legal fees. “The execution of this agreement is not an admission or finding of any violation,” she said.

The lawsuit originated from a 2010 referral by the Board of Governors of the Federal Reserve System to the Justice Department’s Civil Rights Division.  

The Citizens' case, along with an on-going redlining investigation of St. Louis-based Midwest BankCentre, is a clear announcement by DOJ that redlining prosecutions are a priority of this administration.  According to a  recent BloombergBusinessweek.com article ("A Renewed Crackdown on Redlining," May 5, 2011), the DOJ is stepping up its review of potential redlining issues in the aftermath of the subprime lending crisis. In 1994, DOJ reached a landmark settlement with Chevy Chase FSB based on allegations that the bank refused to provide residential mortgage loans in predominately minority areas of the Washington, D.C. metropolitan area. (Read: U.S. v. Chevy Chase Press Release)  Chevy Chase was the first DOJ suit--and last since the recent Citizen's settlement--focusing solely on a bank's refusal to market its services in minority neighborhoods.
 

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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. 

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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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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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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The Associated Press reports that Illinois Attorney General Lisa Madigan has sued Countrywide Home Loans, alleging the company discriminated against African American and Latino borrowers in Illinois between 2005 and 2007.  The complaint includes allegations that Countrywide charged African American and Latino borrowers higher rates and fees compared to similarly situated white borrowers.   The complaint states that Countrywide engaged "in practices that resulted in a disparate impact and disparate treatment of African American and Latino borrowers.  The complaint also alleges that Countrywide utilized lending standards that had no economic basis and were discriminatory in effect..."

While the complaint includes allegations not unfamiliar in lending discrimination cases, it may spark important legal analysis regarding the use of the disparate impact theory as the sole basis to provide lending discrimination.  See prior posting  - "AAG Perez Reiterates DOJ's Emphasis on Lending Discrimination Enforcement," June 24, 2010.

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Speaking at a June 23, 2010 Brookings conference, the Department of Justice's Assistant Attorney General for the Civil Rights Division made clear that investigating and prosecuting lending discrimination is a top priority for his administration.  As reported on mainjustice.com, AAG Thomas Perez reaffirmed the DOJ's commitment to increased oversight and enforcement of the financial industry, as well as close interaction among the federal regulators that police the financial systems.

Mr. Perez also reiterated that his division will use the "disparate impact" theory to file lending discrimination case.  “The government must be a credible deterrent,” he said. “Our Fair Lending Unit will use every tool in our arsenal, including but not limited to disparate impact theory.”  Perez made similar remarks at the May 2010 Legal Issues Conference of the Mortgage Banker's Association.  The disparate impact theory, as articulated in U.S. Supreme Court's 1971 decision Griggs v. Duke Power Co., 401 U.S. 424 (1971), allows a plaintiff to challenge a facially neutral practice that has an unjustified adverse impact on members of a protected class; evidence of an intent to discriminate is not required.  The DOJ's reliance on the disparate impact theory as the sole basis to file a lending discrimination case signals a marked departure from its prior lending discrimination cases, none of which relied exclusively on disparate impact.  The department's aggressive approach will undoubtedly lead to a significant increase in enforcement cases and litigation in this area.  And lenders anticipating this change in enforcement are wise to adapt their compliance program accordingly. 

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The DOJ's Civil Rights Division announced a $6.1 million settlement with two AIG subsidiaries that the government alleged had engaged in a pattern and practice of lending discriminated against African-Americans.  According to the Wall Street Journal, the government identified approximately 2,500 African-American borrowers that will each receive about $2,300 in compensation under the agreement. 

The Justice Department's settlement resolved its complaint filed under the federal Fair Housing Act and Equal Credit Opportunity Act.  The complaint alleges that African-American borrowers were charged higher fees on wholesale loans made by AIG Federal Savings Bank and Wilmington Finance Inc., an affiliated mortgage lending company.

According to the WSJ article, the AIG subsidiaries disagreed with the Justice Department's allegations but were pleased to reach the settlement and "avoid the distractions and burdens of protracted litigation over contentious issues."

The settlement comes a month after the Department of Justice announced the creation of a Fair Lending Task Force, and resulted from a 2007 referral by the Treasury Department's Office of Thrift Supervision to the Justice Department's Civil Rights Division.   In announcing the AIG settlement, Assistant Attorney General Thomas Perez signaled that  more such cases were in the pipeline.  Perez said that for a long time, lenders' supervision over their mortgage brokers was inadequate.

The DOJ's full press release and links to the complaint and settlement agreement are available at the Civil Rights Division's website: DOJ, Civil Rights Division.

The recent settlement sends a clear message that lending discrimination matters are a top priority for the Obama Justice Department, and this is likely the tip of the iceberg.  As DOJ's Civil Rights Division continues to staff its new Lending Discrimination Task Force and communications between the various federal banking regulatory agencies improve, many more complaints and settlements can be expected over the next several months.

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The New York Times reports that the Department of Justice's Civil Rights Division has formed a Lending Discrimination unit devoted to investigating and prosecuting unfair lending practices.  According to Assistant Attorney General Tom Perez, the new unit  will look "at any and every practice in the industry,”   Under the DOJ's most recent budget, the Lending Discrimination unit will include at least 10 lawyers and an economist.   Unlike prior Lending Discrimination prosecutions by DOJ that concerned Redlining and discriminatory underwriting decisions, the new unit will focus on "Reverse Redlining," the practice of targeting minority neighborhoods for loans with inferior terms, including high rates and fees.

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United Security Bancshares Inc., Thomasville, Ala., entered into a settlement agreement with the Department of Justice's Civil Rights Division to resolve allegations that its subsidiary First United Security Bank violated the Fair Housing Act and the Equal Credit Opportunity Act when dealing with African-American borrowers.  According the the Justice Department's press release, the Complaint alleged that the bank charged African-American borrowers higher rates than similarly-situated white borrowers on home mortgage-related loans. The complaint also alleged that the bank engaged in unlawful "redlining" by failing to provide its lending products and services on an equal basis to majority African-American areas in west central Alabama.

Under the Consent Order, which remains subject to court approval, First United Security Bank will invest more than $600,000 to open a new branch in an African-American neighborhood in west central Alabama and take other steps resolve allegations that it engaged in a pattern of discrimination on the basis of race.  The additional steps include investing $500,000 in a special financing program, and spending more than $110,000 for outreach to potential customers, promotion of its products and services and consumer financial education in the redlined areas.

The lawsuit originated from a referral from the Federal Deposit Insurance Corporation (FDIC), according to the DOJ press release.

This is the first Fair Lending case regarding mortgage lending filed by the Justice Department in over a year, and comes on the heals of the FFIEC's release of 2008 HMDA data that, according to  a Wall Street Journal article summarizing the HMDA report, shows that African-Americans and Hispanic whites were far more likely than non-Hispanic whites to be denied last year in applying to refinance.

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A new analysis by the General Accountability Office (GAO) found that the existing fair lending enforcement efforts by bank regulators are not working. In the GAO's Fair Lending report noted that regulators have a fragmented enforcement mechanism that impairs effective fair lending enforcement.  The study also detailed deficiencies in the mortgage data currently made available through the Home Mortgage Disclosure Act (HMDA).  In particular, the GAO found that a lack of data concerning borrower credit risk and race/gender information for non-residential mortgages (i.e., small business loans) limited "agencies' and regulators' capacity to identify potential lending discrimination."

The GAO reports comes at a time when congress is considering President Obama's plan for a single financial services consumer regulator--the Consumer Financial Products Agency.   The GAO report may fuel the arguments of advocates who claim that the current system doesn't work, and that a consolidated enforcement agency is necessary.  The GAO report also renews the debate about the adequacy of the HMDA requirements, and whether lenders should be required to report more information about their lending practices.

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In a highly anticipated decision, a divided U.S. Supreme Court  authorized states to investigate national banks for lending discrimination, thus rejecting the OCC's position that its regulatory authority preempted states' enforcement powers.   In the 5-4 opinion authored by Justice Scalia, the high court in Cuomo v. Clearing House Association, LLC held that federal banking regulations did not pre-empt states from enforcing their own fair-lending laws.

The ruling decided a dispute between the OCC and the New York attorney general's office, which had initiated investigations into national banks' residential real-estate lending practices.  Former Attorney General and Governor Eliot Spitzer initiated the investigation of several banks, including Wells Fargo, JPMorgan Chase and Citigroup, based on mortgage data he claimed showed black and Hispanic borrowers received a larger percentage of high-interest home loans than white borrowers.

CNN reported the mixed reactions to the ruling.  The American Bankers Association issued a statement contending that the ruling "changes over 140 years of settled law," and expressed concern that national banks will  "face a patchwork of duplicative and conflicting federal and state regulation and enforcement actions."  On the other hand, current New York Attorney General Cuomo said the ruling "reaffirms the vital role state attorneys general play in protecting consumers from illegal and improper practices by our country's biggest and most powerful banks."  Similarly, the Lawyers' Committee for Civil Rights Under Law applauded the decision, stating in a press release that the the decision "will unshackle the oversight muscle of state attorneys general whose attempts to enforce fair lending laws against national banks were thwarted when most needed." 

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On June 17, 2009, Attorney General Eric Holder testified before the United States Senate Committee on the Judiciary regarding the U.S. Department of Justice's recent accomplishments and current priorities.  In his statement, Holder made clear that prosecuting mortgage fraud and other financial crimes will continue as a top Department priority.  In addition, he emphasized the Department's commitment to combating lending discrimination.

In addition to focusing on fraudulent scams, I am committed to ensuring that homeowners who may be having difficulty making their mortgage payments do not experience discrimination and can benefit in equal measure from legitimate loan modification programs and other federal programs to provide mortgage assistance and stabilize home prices. Discrimination in lending on the basis of race, national origin, or other prohibited factors is destructive, morally repugnant, and against the law. Lending discrimination prevents those who are discriminated against from enjoying the benefits of access to credit, including reasonable mortgage payments, so they can stay in their homes and provide much needed stability for their neighborhoods. We are using the full range of our enforcement authority to investigate and prosecute this type of unacceptable lending discrimination.

Beginning in the early 1990's with ground-breaking cases filed and settled against Decatur Federal Savings & Loan (consent order), Chevy Chase FSB (consent order), and Shawmut Mortgage (consent order), the DOJ's Civil Rights Division aggressively pursued lending discrimination investigations and prosecutions concerning underwriting, pricing, and redlining.   However, more recently the number of filings in this area has dropped precipitously for a number of reasons, not the least of which is the abundance of available credit in the market and changed priorities within the Department.  With a tightening credit market, more stringent underwriting standards, and a re-committed Justice Department, Attorney General Holder's recent statement may signal a renewed interest in lending discrimination matters. 

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