DOJ Fair Lending Focus Continues in Settlement of Case Challenging Lender's Minimum Loan Amount Policy

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The Department of Justice's recent announcement that it had settled its case against Luther Burbank Savings challenging Luther's minimum loan amount policy demonstrates the DOJ's continued focus on fair lending. The settlement underscores the need for lenders to have their lending policies reviewed by counsel for compliance with fair lending laws and to be prepared to defend such policies against fair lending challenges.

The DOJ's complaint, filed in the U.S. District Court for the Central District of California, alleged that from 2006 through mid-2011, Luther enforced a $400,000 minimum loan amount policy for its wholesale single-family residential mortgage loan program. The DOJ charged that the policy violated the Equal Credit Opportunity Act and the Fair Housing Act because it had a disparate impact on the basis of race and national origin. Using Home Mortgage Disclosure Act data reported by Luther and other residential mortgage lenders, the complaint alleged that Luther originated significantly fewer single-family residential mortgage loans to African-American or Hispanic borrowers or in majority-minority tracts throughout California than comparable prime lenders.

The settlement requires the bank to make available at least $1.1 million in a special financing program designed to increase Luther's residential mortgage loans to qualified California borrowers seeking loans of $400,000 or less. Luther must also spend at least $450,000 on partnerships with community-based organizations that provide credit and financial services to minorities, (2) $300,000 on targeted advertising and marketing to minorities, and (3) $150,000 on credit counseling, financial literacy and other consumer education programs. Luther is prohibited from establishing or implementing a $400,000 minimum loan amount policy and must notify the DOJ before increasing its current $20,000 minimum loan amount (which took effect in 2011 after the lawsuit was referred to the DOJ by the Office of Thrift Supervision). The settlement also requires Luther to provide fair lending training to its employees and to offer such training to brokers who refer loans to the bank.

While the DOJ may continue to pursue disparate impact claims that are already in its pipeline, that legal theory is on shaky ground. In fact, the U.S. Supreme Court could have another opportunity to decide whether disparate impact claims are available under the Fair Housing Act if it grants the petition for certiorari filed in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. As discussed in our prior legal alert, the issues in Mount Holly are virtually a carbon copy of those raised in Magner v. Gallagher, which was dismissed by the parties soon before the Supreme Court was scheduled to hear oral argument.

As a possible harbinger of future DOJ actions, the DOJ last month announced the settlement of a "pattern or practice" fair lending lawsuit against GFI Mortgage Bankers, Inc., that restyled a disparate impact case as a "knew or should have known" disparate treatment case. The settlement required GFI to pay a total of $3.555 million, consisting of $3.5 million in monetary damages to aggrieved borrowers and a $55,000 civil penalty. Our prior legal alert about that settlement questioned the DOJ's attempt to use disparate impact evidence to establish that GFI had engaged in intentional discrimination.

Because of the importance of these cases to our clients, Ballard Spahr will be conducting a webinar on "Fair Lending Lessons from the DOJ's Settlement with GFI” on Wednesday, October 10, 2012, from 12 p.m. to 1 p.m. ET.  To register, send an e-mail to questions@ballardspahr.com.

To help consumer credit providers prepare for examinations and to prevent, manage, and defend against the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of Consumer Financial Protection Bureau examinations), litigators who defend against claims of fair lending violations, and attorneys who likewise understand the statistical analyses that underlie fair lending assessments and discrimination claims.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance. The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions