The government's attack on loan bias is increasingly focusing on loan pricing.
Well-placed sources say the Justice Department is investigating several mortgage operations for possibly encouraging loan officers and brokers to charge above-market interest rates to minorities.
The sources, including government employees and private lawyers, described the probes as relatively advanced and potentially very damaging to the lenders. At least 500 borrowers at each company may have been effected, one source said.
Though the identities of the companies could not be learned, the investigations highlight the growing importance of pricing to fair-lending enforcers. In March, the major domestic automakers revealed that the government was investigating whether minorities pay higher rates than whites for car loans.
The emphasis of the government's enforcement program "appears to be shifting from underwriting issues to pricing issues, from issues of whether someone does or does not get a loan to how much someone pays for a loan," said Andrew Sandler, a partner at Skadden, Arps, Slate, Meagher & Flom.
The mortgage probes center on "overages," additional charges to consumers that often are encouraged by lending companies' compensation plans.
Some mortgage concerns offer their loan officers and brokers rewards for closing loans at above-normal prices. Most often, additional fees, or points, are tacked onto the loan. The company then splits the additional payment with the loan producer.
Government officials suspect that lenders charge minorities higher prices more frequently than others because minorities may be less familiar with mortgage costs.
Lawyers for the mortgage lenders say the government is on shaky ground.
In effect, the Justice Department is trying to determine whether lenders can set their own prices or must comply with a "government-imposed 'manufacturer's suggested retail price,'" says a lawyer representing one lender under scrutiny by the department.
A lawyer familiar with the situation said the department should be ready to file at least one suit in one to three months. The department may delay filing should settlement negotiations begin.
The lawyer said the case mirrors one in which First National of Vicksburg, Miss., was charged in 1994 with offering higher interest rates to minorities than to other applicants. The bank settled the charges.
Another lawyer said the Justice Department is working on some other cases that were referred as a result of normal compliance examinations.
A Justice Department spokesman declined to comment, but the department has clearly signaled its interest in overages.
For example, Assistant Attorney General Deval Patrick referred to the pricing practice in a Feb. 21 letter to bankers and home lenders.
Mr. Patrick wrote that the department would concentrate its fair-lending enforcement on three areas, including "differential costs of credit based on unlawful discrimination rather than individual applicant creditworthiness."
At a private meeting Monday, a Justice Department prosecuter, Alexander Ross, put forth a number of hypothetical future prosecutions, all of which dealt with overages. The group included trade group officials and Paul Hancock, a top enforcer in the Justice Department's civil rights division.
One example focused on what the department should do if it found that banks charged all female borrowers higher rates.
Some of those at the meeting said they assumed the department was preparing them for an upcoming case. But a Justice Department source said the use of an example of overages at Monday's meeting was purely coincidental and had no greater meaning.
The Justice Department is not the first federal agency to focus on overages. A year ago the Federal Reserve and the Office of the Comptroller of the Currency warned lenders about overages.
Community activists applaud the government's increased attention to loan overcharges.
"A few well-chosen lawsuits could go a long way to cleaning up sloppy industry practices," said Allen Fishbein, general counsel at the Center for Community Change.
