By Jeff Bater
Sept. 24 — The government warned the banking industry about discriminatory loan practices after it ordered a lender in the Northeast to pay more than $30 million for alleged illegal redlining, and suggested it might crack down further on that kind of conduct.
The Justice Department (DOJ) and the Consumer Financial Protection Bureau (CFPB) settled with Hudson City Savings Bank, which was accused of denying black and Hispanic neighborhoods fair access to mortgages. The savings association, which is based in Paramus, N.J., was ordered to pay $27 million to increase credit access in the affected communities and a $5.5 million fine.
In a news release, Vanita Gupta, who is principal deputy assistant attorney general at DOJ, said the case “should send a message to lenders throughout the country that the Justice Department will not tolerate racial discrimination in the extension of credit.”
During a press call after the settlement was announced, Gupta said redlining is not a vestige of the past. “Banks continue to build and structure their lending operations in a way that avoids or fails to meaningfully serve communities of color based on assumptions about the financial risk that residents of these communities pose to the banks' bottomline,” Gupta said. “The resulting lack of presence of banks exposes these communities to less desirable financial products and predatory lending practices.”
Jaret Seiberg, an analyst at Guggenheim Securities, said the deal creates “a disturbing precedent.” The consent order calls for Hudson City to make payments to a loan subsidy program to increase access to affordable credit in affected communities. The loan subsidies can include interest rate reductions, closing cost assistance, and down payment assistance.
“This is certainly a way to expand home ownership opportunities for minorities without the need for Congress to appropriate funding,” Seiberg wrote in e-mailed market commentary. “As such, we believe this could become a very attractive option for future Justice Department fair lending cases. To us, this means fair lending litigation against the biggest lenders is inevitable.”
Furthermore, Seiberg said the case sets up “a very interesting conflict” between the bank's fair lending commitment and compliance with the CFPB Qualified Mortgage rule’s ability-to-repay test. The CFPB standards went into effect in 2014, and are basically a post-crisis effort meant to prevent situations in which consumers receive loans they cannot afford.
“In effect, the bank is looking for borrowers that only could qualify for credit with the subsidy,” he wrote. “These would seem to be the same borrowers who are most likely to flunk the ability to repay test even with assistance. And if the bank is not targeting these marginal borrowers, then we question the point of directing a monetary settlement to borrowers who already can qualify and afford a mortgage.”
Richard Cordray, the head of the CFPB, said during the press call that rooting out discrimination to ensure fair and equal access to credit for all qualified borrowers remains a priority.
The DOJ has enforced the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA) in recent years to remedy residential mortgage redlining across the U.S. Gupta said the department currently has “an increased number of active mortgage redlining investigations.”
“Banks and lending institutions should be on notice that the Justice Department continues to focus on discriminatory conduct in mortgage lending and that such conduct will not be tolerated,” Gupta said.
In the last five years, the DOJ has settled 20 suits alleging discrimination in mortgage lending, Gupta said, calling on banks to be proactive in identifying responsible lending opportunities that exist in predominantly minority neighborhoods within their market areas and to lend fairly to all residents of those communities.
Seiberg said he would be looking at any political reaction to the settlement carefully.
“Republicans historically have argued such settlements are nothing more than credit allocation and they have blamed this type of federal intervention in the market for fueling the mortgage mess that triggered the financial crisis,” he wrote. “ We can see the talking points already with headlines contending that the Justice Department is trying to re-create the conditions that crashed the economy. We believe a further politicalization of housing policy further erodes any chance for legislation in the coming years.”
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