The government will not train its fair-lending sights on banks that charge higher rates to borrowers who are more likely to default on their mortgages, according to a senior Justice Department official.
"We are trying hard not to interfere with risk-based pricing," said Paul F. Hancock, chief of the department's housing section. "The whole lending concept is to make loans based on the risk to the institution."
Speaking at a fair-lending conference sponsored by the Consumer Bankers Association, Mr. Hancock also said the Justice Department will not go after lenders that simply purchase loans. The only exception is for banks that were aware of the discrimination when they bought the loans.
The Justice Department is focusing on institutions that consistently charge minorities more for loans than they charge white applicants with similar credit histories, he said.
Mr. Hancock's comments were intended to calm industry officials who were alarmed by the department's settlement last week with Long Beach Mortgage Co., a B and C lender that focuses on minority communities. While it agreed to pay $4 million to minority applicants, Long Beach admitted no wrongdoing.
Some lenders had feared that the department, in its effort to eradicate pricing discrimination, wanted the industry to abolish risk-based pricing.
But Mr. Hancock said Long Beach did not use risk-based pricing. Rather, he said, it illegally overcharged minorities, women, and the elderly for mortgages. Its pricing decisions were not related to the risk of default, he said.
Mr. Hancock noted that the Long Beach settlement did not involve the purchase of loans. Rather, the lender underwrote the mortgages itself. That is why the Justice Department held it responsible for the prices set by independent brokers, he said.
"A lender is responsible for the loans it makes," he said.
More lending-bias battles are forthcoming. The Justice Department is investigating several independent mortgage banks for overcharging minorities for government-backed loans, Mr. Hancock said. He said the department is still investigating whether discrimination is responsible for what studies show to be a mortgage rejection rate that is double for black applicants what it is for whites.
Mr. Hancock urged bankers confused by the Long Beach settlement to contact his office. "We have never begun an investigation of someone who has asked us a question," he said.
