Acting on a referral from the Federal Deposit Insurance Corporation, the Department of Justice pursued a case against Charter Bank, asserting the financial institution violated the Equal Credit Opportunity Act by discriminating based on national origin when making vehicle-secured loans.
What happened
To settle allegations that the bank violated the Equal Credit Opportunity Act (ECOA) with respect to non-purchase money loans secured by a consumer’s vehicle, Texas-based Charter Bank agreed to a proposed consent order with the Department of Justice (DOJ).
Pursuant to bank policy in place for more than five years between January 2009 and June 2014, loan officers at the bank had discretion to deviate up or down from the interest rates listed on the bank’s rate sheets by roughly three percentage points. The result, according to the DOJ: Hispanic borrowers paid higher prices than similarly situated non-Hispanic borrowers, on average 108 basis points more. A lender does not collect demographic information on borrowers in connection with automobile loans, and the DOJ instead based its claim on a “proxy methodology” using geography-based and name-based probabilities.
The alleged problem was raised during an examination by the Federal Deposit Insurance Corporation (FDIC) that ended in June 2014 with the regulator reaching out to the DOJ.
The disparity in lending rates was “statistically significant, and the difference is based on national origin and not based on creditworthiness or other objective criteria related to borrower risk,” according to the DOJ’s complaint. Charter ran afoul of the ECOA by instituting a policy providing loan officers with “broad subjective discretion” in setting interest rates with a disparate, detrimental impact on Hispanic borrowers that was not justified by business necessity or legitimate business interests that could not be reasonably achieved as well by means less disparate in their impact on Hispanic borrowers, the agency told the court.
Charter failed to properly instruct loan officers with regard to the ECOA and how to treat prospective consumers without regard to national origin, the DOJ alleged. In addition, the bank neglected to supervise or monitor the performance of its officers to ensure fair lending compliance, the agency said.
Further, the bank’s policy constituted intentional discrimination, the agency alleged, because the challenged pattern or practice was “implemented with reckless disregard for the rights of Hispanic borrowers.”
To settle the suit, the bank agreed to pay $165,820 as monetary damages for affected borrowers, provide ECOA training to bank employees, and display a notice of nondiscrimination. Charter, which revised its policy in August 2014 to prohibit discretionary rate setting by loan officers, must also maintain its current pricing policy that does not permit loan officer discretion as well as a monitoring program designed to detect disparities in interest rates and pricing adjustments for the bank’s loan products.
To read the complaint in U.S. v. Charter Bank, click here.
To read the proposed consent order, click here.
Why it matters
The DOJ action offers a warning for lenders about the risks involved in discretionary pricing, and further evidence that the DOJ continues to use its controversial proxy methodology in non-home loan situations where no direct demographic information is gathered by the lender. Charter Bank’s prior policy permitting officers to deviate from standard pricing caught the attention of the FDIC, which tipped off the DOJ to bring the action. Lenders who permit such discretionary pricing should review their policies and procedures to ensure they are in compliance with the ECOA and other fair lending laws.
