DOJ Fair Lending Basics

1. DOJ Fair Lending Basics Statutes: Fair Housing Act Equal Credit Opportunity Act Servicemembers Civil Relief Act Sources of Cases: Referrals Complaints DOJ-initiated matters

2. DOJ Fair Lending Basics Types of Credit: Mortgage and other housing-related Auto, credit cards and other consumer Small Business

3. Types of Fair Lending Cases Pricing/Steering Redlining Underwriting Servicing Reverse Redlining/Predatory Lending (if targeted at a protected class)

4. Recent FHA Fair Lending Cases U.S. v. AIG FSB and Wilmington Finance (2010) broker fee pricing (mortgages) U.S. v. First United Security Bank (2009) pricing and redlining (mortgages and small business loans) U.S. v. First Lowndes Bank (2008) pricing (mobile home loans)

5. United States v. AIG FSB & Wilmington Finance, Inc. (2010) Complaint alleged that African-American borrowers were charged higher fees for wholesale loans than white customers in violation of ECOA and FHA Loans were underwritten and funded by defendant lenders; arranged by brokers

6. United States v. AIG FSB & Wilmington Finance, Inc. (2010) Holds lenders accountable for racially discriminatory broker fees Lender is creditor under ECOA when “regularly participates in a credit decision, including setting the terms of the credit”

7. United States v. AIG FSB & Wilmington Finance, Inc. (2010) • Allegations included: • Significantly higher fees for thousands of African-American borrowers, not explained by non-racial factors • Broad, unmonitored broker discretion in setting fees, with no formal guidelines other than for YSPs • Based on referral from OTS

8. United States v. AIG FSB & Wilmington Finance, Inc. (2010) Consent order filed with complaint includes: • non-discrimination injunction • $6.1 million fund for victim damages • minimum $1 million for consumer education • new broker fee standards and monitoring if either lender re-enters wholesale business

9. United States v. First United Security Bank (2009) Redlining claim: alleged failure to provide lending services to African-American areas of west central Alabama Pricing claim (referred by FDIC): alleged bank charged significantly higher rates to African-American customers than similarly-situated white customers

10. United States v. First United Security Bank (2009) • Pricing claim: • Identified by FDIC through analysis of HMDA data • Statistical analysis by FDIC found pricing disparities in bank’s HMDA data • FDIC & DOJ investigations obtained additional data from the bank • e.g., credit score, loan characteristics

11. United States v. First United Security Bank (2009) • Complaint alleges: • FUSB charged African-American borrowers higher interest rates on conventional, first-lien refi loans than similarly situated white borrowers • Differences of approximately 62 basis points were not explained by borrower or loan characteristics and were statistically significant

12. United States v. First United Security Bank (2009) • Redlining evidence included long term pattern in majority African-American counties and census tracts of: • no branches • little or no marketing • exclusion from the bank’s three • separate CRA assessment areas • extremely low proportion of loans

14. United States v. First United Security Bank (2009) • Redlining claim: • Evidence of low proportion of loans in majority African-American counties and census tracts developed from HMDA analysis • Used “market area” designated in SEC 10K reports because African- American areas were excluded from bank’s CRA assessment areas & bank operated outside of MSAs

15. United States v. First United Security Bank (2009) • Complaint alleged that from 2004-2006: • Bank made only 218 of its 1563 mortgage loans (14%) in majority-minority census tracts • Comparable lenders made 31% of such loans in majority-minority census tracts (twice as many) • This difference is statistically significant

17. United States v. First United Security Bank (2009) • Complaint alleged that from 2004-2006: • Bank made only 245 of its 2134 CRA small business loans (11.5%) in majority-minority census tracts • All lenders made 21% of such loans in majority minority census tracts (almost twice as many) • This difference is statistically significant

19. United States v. First United Security Bank (2009) Consent order filed with complaint includes: • non-discrimination injunction • one new branch in a majority A-A area • revised credit policy • training requirements • affirmative outreach and marketing • revised CRA assessment areas

20. United States v. First United Security Bank (2009) Monetary relief: • $500K in loan discount fund • $110K for outreach • $55K damages for African-American customers charged higher interest rates

21. Reverse Redlining Investigations Redlining by prime lenders left minority areas exposed to possible “reverse redlining” or targeting of subprime loans to those areas Several ongoing

22. Reverse Redlining Investigations Investigations may focus on: Disproportionate share of subprime loans made to minorities Specific marketing to minorities Vulnerability of borrowers Predatory nature of loans Prime products targeted at whites; subprime products targeted at minorities

23. Emerging Fair Lending Issues • Allegations of discrimination in: • Mortgage servicing/loan modification programs • Loss mitigation programs • Foreclosures • “REO” (lender-owned) properties • FHA lending

24. U.S. Department of Justice Civil Rights Division Housing and Civil Enforcement Section, NWB www.usdoj.gov/fairhousing Donna M. Murphy, Deputy Chief (202) 514-1775 donna.murphy@usdoj.gov