The Justice Department's latest move against lending discrimination has hit the mortgage industry like a thunderbolt.
In an action two weeks ago against Maryland's Chevy Chase Savings Bank, the department made clear that lenders must seek to gain as much market share in minority communities as they do in white neighborhoods.
Though uncertain of all the implications, lenders say they are already examining their marketing strategies and their branch locations to see if they meet the government's new standards.
"I'm going to look very closely at how our branches are distributed," says Cathy Bessant, director of community investment at NationsBank Corp. "I'd be an idiot not to."
"How you convey the [marketing] message, and what you say in that message will all have to be reengineered," adds Angelo Mozilo, president and chief executive of Countrywide Funding Corp., the nation's largest mortgage lender.
As they prepare to meet the new requirements, however, lenders worry that increased lending in low-income neighborhoods will cut into profits. And they fret that an activist federal government will escalate its intrusions into the lending business.
"This whole area reminds me of the invisible fence people use to keep their dogs in," says Robert M. O'Toole, senior staff vice president at the Mortgage Bankers Association. "We don't know where the electric shock is coming from."
Previous prosecutions by the Justice Department focused on higher rates of rejection for minority customers who applied for home loans. In response, lenders go over rejected loan applications a second time, and send in "mystery shoppers" to make sure that minority applicants are being treated equitably.
In the Chevy Chase case, the government went a step further in its fair-lending prosecution to zero in on marketing practices and market share.
The department accused the largest thrift in metropolitan Washington of marketing its products exclusively in white census tracts in Washington and suburban counties.
The thrift's market share in white census tracts ranged from 1.5% to 2.1% from 1990 to 1992, while it had only 0.2% to 0.4% of the market in black census tracts during the same period. No nonracial factors could account for the difference, the government said.
Chevy Chase denied wrongdoing, but settled the case.
It agreed to open one new branch and three new mortgage offices in predominantly black areas of metropolitan Washington.
It also said it would make discounted loans to borrowers in the formerly "redlined" neighborhoods, beef up advertising in minority communities, bolster ties with minority realtors, and hire more minority employees.
The total price tag of the settlement: $11 million.
Housing advocates warn that many other lenders are vulnerable to similar prosecution.
"Many lenders throughout this country ... started out in central cities, moved to the suburbs, and deemphasized central cities," says Allen Fishbein, general counsel at the Center for Community Change in Washington.
"I think many lenders could come under scrutiny under the Justice Department's principles."
"My advice to lenders is to look at whether differential energy is put into generating applications from minorities as white populations," Mr. Fishbein adds.
"It's not enough to just treat the applications equally. It's important to reflect the demand in minority communities," he says.
All borrowers within a market area must be treated the same, agrees Mr. O'Toole of the Mortgage Bankers Association.
"If you advertise in one part, you have got to advertise in other [minority] parts," he says.
Lenders should take a "hard look" at their business plans to make sure that realty broker contacts, advertising, branch location, and products are comparable for all groups of borrowers, he says
"There is every indication from Justice that they will look at marketing when they decide to bring an action," he adds.
For many lenders, the government's drive to push them into low-income markets is a bitter pill to swallow. They worry that the policy will lead to bad loans and lower profits.
"I think they're going too far," says J. Winston Brown of Traditional Mortgage Corp. in Atlanta. "They're telling people where they've got to do business. It's too much government interference in private enterprise."
There's "a holy search for finding violations," adds an angry executive at one large lending operation.
The chief executive of a bankowned mortgage company says his bank is already "under extraordinary pressure" to expand its share of the market in lowincome and moderate-income areas, and heavily discounts loans in those markets.
But as other financial institutions jockey to get in, the bank will be hard-pressed to hold on to its share, the CEO says.
When too many lenders are forced to chase after too few loans, the risk of bad loans rises, warns Mr. Mozilo of Countrywide.
Though "well intentioned," the government's fair lending policies could lead to an "irresponsible and destructive extreme," Mr. Mozilo says.
For all the heartburn, many senior executives are fatalistic in the face of such sweeping change.
"All we can do is all we can do," says the CEO of the bankowned mortgage company. "I just hope for perspective from regulators and law enforcement officials ."
Fleet Financial Group, reasserting itself in residential mortgage lending, said Tuesday that it has agreed to buy a California-based mortgage bank for about $120 million.
The Providence, R.I.-based banking company said it will acquire Plaza Home Mortgage Corp., which processes monthly payments on some $9.2 billion of mortgages. That will increase Fleet's servicing portfolio by 12%, to about $88 billion.
The purchase marks Fleet's second sizable mortgage banking purchase in as many weeks. On Thursday, Fleet announced that it will buy $5.9 billion of mortgage loan servicing fights from Countrywide Credit Industries.
Though long a leader in the field, Fleet's mortgage unit Fleet Mortgage Group - had previously sat out this year's acquisition frenzy in mortgage banking. Chase Manhattan Bank, Chemical Bank, and NationsBank have all purchased mortgage assets in recent months.
Analysts were upbeat about the move.
"It looks like Fleet Mortgage, with the backing of Fleet Financial, can come out of this slump as one of the strongest mortgage banks," said Thomas O'Donnell of Smith Barney.
The price, which works out to $101/s per Plaza share, is conservative, according to Gary Gordon of PaineWebber Inc. "They are paying very little for the loan production."
Fleet said the new servicing rights will vault it to No. 2. from No. 3 among servicers nationwide, supplanting Prudential Home Mortgage. Fleet also will get Plaza's 33 loan offices as well as its network of mortgage loan brokers.
Fleet Financial vice chairman Michael R. Zucchini, who is also acting chairman of Fleet Mortgage, said the acquisition will "expand Fleet's ... operations into states where we have a modest presence, particularly California and others in the West." Plaza, which buys almost all of its loans from brokers and correspondents, has been hit hard by rising interest rates. Though the company produced some $8.4 billion of loans last year, production has slumped by more than 50% in some months this year, leading the company to lay off workers. Plaza also has a subsidiary, Option One Mortgage Corp., which makes loans to less creditworthy borrowers. Option One will operate as a separate unit, with headquarters in California.
