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

On May 26, 2011, the U.S. Department of Justice announced a $20 million settlement with units of Bank of America and Morgan Stanley to resolve allegations of improper foreclosures on about 160 military members between 2006 and 2009.  The government alleged that the foreclosures, many concerning foreclosures that were taken or started by Countrywide Mortgage prior to Bank of America's acquisition, violated the Servicemembers Civil Relief Act (SCRA).  In April, JPMorgan Chase & Co. agreed to settle similar allegations in a lawsuit filed in federal court in South Carolina.

The agreement is included in a "Memorandum of Agreement Between the United States of American and Bank of America Corporation."  No litigation was filed.

The DOJ's Civil Rights Division has added scores of lawyers and other professionals to its Housing & Civil Enforcement Section, which is charged with enforcing the SCRA and Fair Lending laws, including the Fair Housing Act and Equal Credit Opportunity Act.  Continued, aggressive prosecution of cases involving mortgage lending is expected out of that section for the foreseeable future.

Read DOJ Press Release.

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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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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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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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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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