The U.S. Department of Justice (DOJ) has announced a proposed consent order with Sage Bank to settle charges that the bank violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) by discriminating on the basis of race and national origin in connection with its residential mortgage lending.
The DOJ claimed that the bank’s pricing system resulted in African-American and Hispanic borrowers paying higher prices for mortgage loans than similarly qualified white borrowers. The DOJ said that the action originated from a referral by the Federal Deposit Insurance Corporation.
According to the DOJ’s complaint filed in Massachusetts federal district court, the bank used a “Minimum Base Pricing” (MBP) system to price mortgage loans sold to investors on the secondary market. The MBP represented the net revenue target that a loan officer was expected to achieve on each loan he or she originated through the interest rate and fees.
The complaint alleged that the pricing system resulted in African-American and Hispanic borrowers paying more for loans than white borrowers and the higher prices could not be “fully explained by factors unrelated to race or national origin.” The DOJ claimed that a contributor to this disparity was that African-American and Hispanic applicants were served disproportionately by loan officers with MBPs that were higher than the MBPs of loan officers serving predominately white applicants. The higher MBPs “were not justified by individual characteristics of [such minority applicants].” Another contributor was that loan officers allegedly marked up loans to African-American and Hispanic borrowers above their MBPs to a greater extent than they marked up loans to white borrowers.
According to the DOJ, the bank gave loan officers discretion to price loans above their MBPs without any requirement to obtain management approval or document or provide reasons for such higher pricing. The DOJ claimed that such discretion “resulted in loan prices that were higher than what the objective credit characteristics of the borrowers dictated” and “exacerbated the risk that similarly qualified borrowers would receive differently priced loans.”
In the complaint, the DOJ asserted various theories for its FHA and ECOA claims. The complaint alleged that the bank’s pricing system created a “foreseeable disparate impact.” (The complaint’s focus on the bank’s pricing system might be intended to address the U.S. Supreme Court’s admonition in Inclusive Communities that a disparate impact claim based upon a statistical disparity “must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.”)
The DOJ also charged that the bank “engaged in a pattern or practice of discrimination and denial of rights under the FHA and ECOA” and that its “policies and practices were intentional, willful, or implemented with reckless disregard for the rights of African-American and Hispanic applicants and borrowers.” Although the DOJ did not directly say so in the complaint, its allegation of intentional discrimination was presumably based on the bank’s alleged knowledge of borrowers’ race or national origin and the primarily minority composition of the population served by loan officers with higher MBPs.
The consent order, which is subject to court approval, requires the bank to pay $1.175 million into a settlement fund to compensate aggrieved borrowers. It also requires the bank to establish a loan pricing policy “that shall minimize fair lending risk and mandate documentation of loan officer decision-making and managerial approval,” and a monitoring program to assess pricing disparities on at least a semi-annual basis. In addition, the bank must establish a loan officer compensation policy that ensures compliance with the Truth in Lending Act/Regulation Z provision that generally prohibits loan officers from receiving compensation based on any loan term other than the amount.
The DOJ’s action demonstrates that there are risks when loan officers have different pricing or are permitted to deviate from standard pricing. Lenders that have different pricing for loan officers and/or permit loan officers to deviate from standard pricing should conduct an analysis to assess if there are potential trends that could be viewed as presenting a fair lending concern to regulators.