O.C. Firm Settles Landmark Suit on Fair Lending
The U.S. Justice Department, delving for the first time into the private mortgage industry’s lending practices, won a $4-million settlement Thursday from an Orange County company accused in a lawsuit of overcharging minority, female and elderly customers.
Long Beach Mortgage Co., based in Orange, agreed to pay $3 million to as many as 1,200 customers and to spend an additional $1 million to educate consumers on how to shop for the most advantageous loans.
The Justice Department, which reviewed mortgages made from 1990 through 1994, asserted that the company’s loan fees for many African Americans, Latinos, women and elderly people included an added fee of up to 12% of the loan amount--a fee not charged to younger, white males.
The company denied any wrongdoing, saying it agreed to the settlement to avoid the costs of litigation.
Thursday’s action comes amid conflict between the private mortgage industry, which sought to limit the Justice Department’s investigation into brokers’ fair lending practices, and activist groups, which are pushing for more regulation.
“This is more than a shot across the bow; it’s a direct hit on the side,” said John Taylor, president of National Community Reinvestment Coalition, a community activist group in Washington. “It’s a wake-up call if there ever was one.”
The lawsuit also marks the first time the Justice Department’s civil rights division took action against a lender based on gender and age bias in loans, said Paul F. Hancock, chief of the agency’s housing and civil enforcement section.
The company denied that it had engaged in any wrongdoing and charged that the lending model developed by the Justice Department to support the discrimination charges was seriously flawed.
“We’re in business to make loans to people with impaired credit history,” said the company’s lawyer, Ronald Stevens. “We’re not going to engage in conduct that is counterproductive to the very group that is our base.”
The Justice Department has not yet identified the 1,200 customers, but it contends that the loan files show evidence of price discrimination. Most of the files involved mortgages in Los Angeles and Alameda counties, the agency said.
The agency previously has sued 10 banks and savings and loans nationally over alleged violations of fair lending practices. The latest was a $4-million settlement reached in May with Fleet Mortgage Corp. over two branches that charged African Americans and Latinos higher upfront fees on mortgages.
The actions against regulated, depository institutions have led the banking industry to pressure the agency for action against private mortgage companies, which are a dominant force in home financing. The private industry provided $654 billion in home loans last year.
Hancock cautioned, however, that the agency wasn’t “bringing down the hammer” on the industry. “This is just one case,” he said. Nevertheless, he acknowledged, the Justice Department has been saying for some time that it would look into the private mortgage industry.
“We believe the entire credit industry is subject to fair lending laws,” he said.
The Justice Department said that Long Beach Mortgage lawfully set basic rates and fee structures based on various risk categories.
However, the company allowed independent brokers to add up to 12 points--$12,000 for a $100,000 loan--to customers it brought to Long Beach Mortgage and that it allowed its own employees to charge similar fees. Brokers would receive the additional fees, while employees shared the fees with the company, the agency said.
“The totality of loan originations by Long Beach reveals that African American, Latinos, women and persons over the age of 55 were charged higher prices for their loans than the terms and conditions granted to persons without those characteristics who presented similar levels of risk to the lender,” the agency alleged in its lawsuit.
In addition, anyone with a combination of such characteristics was charged even more, especially if brokers brought in the business.
Thus, an African American woman over 55 was 2.6 times more likely to be charged an additional six points than a younger white man under employee-generated loans. Such a woman was four times more likely to be charged the higher fees under broker-generated loans, the agency said.
Long Beach Mortgage executives were adamant that nothing improper occurred.
Company President John Mayesh said the firm had no control over what independent brokers charged in addition to the company’s normal rates.
Company lawyer Stevens acknowledged that employees did get paid commissions from additional fees “to the extent that a borrower was willing to pay a price above the base price.”
Mayesh said the company is building a coalition with civil rights organizations and neighborhood associations to develop pamphlets and forums to educate consumers on such matters as loan options and evaluating loan pricing.
“This consumer education came entirely from Long Beach Mortgage,” he said. “It’s something we wanted to do. We felt it was the best way to educate people.”
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Settlement Requirements
Long Beach Mortgage Co. has agreed to the following course of action in order to settle a federal loan discrimination suit. In total, the plan will cost the firm about $4 million. Required actions:
* Create a $3-million fund to reimburse 1,200 borrowers who paid higher costs because of alleged discrimination.
* Educate all employees involved in retail mortgage loan pricing about the laws and consequences of loan discrimination.
* Step up efforts to place all mortgage loan applicants in the appropriate risk categories, based on objective credit and risk-related criteria.
* Develop and implement a statistical monitoring system to track its retail mortgage loan prices on a quarterly basis.
* Contribute $1 million toward a consumer education program on how to shop for a mortgage.
* Inform all mortgage brokers it contracts with about its efforts to adhere to nondiscriminatory practices.
* Expand documentation of wholesale loans.
Source: U.S. Department of Justice
