Fleet Financial Group has agreed to pay $4 million to settle federal charges that its mortgage unit discriminated against 600 minority borrowers.
The penalty, announced Tuesday, is the second-largest in a bank fair- lending case. Chevy Chase (Md.) Federal Savings Bank made an $11 million settlement in 1994.
The agreement announced Tuesday requires Fleet to establish a detailed monitoring program to ensure that minorities do not pay more for mortgages than whites. This system could point the way toward standardization of so-called overages.
Fleet was accused last year of charging higher rates and points to minority borrowers through branches in New York and New Jersey. The U.S. Justice Department said loan officers abused the company's overage policy, permitting extra compensation to originators of higher-interest loans.
A subject of considerable debate within the industry, the practice can lead to bias allegations if loan officers refuse to negotiate with minority applicants, assuming they will not shop around.
But mortgage lenders do not want to eliminate overages because the extra pay can attract good sales people.
Fleet still maintains its borrowers were not discriminated against. "Fleet Mortgage Group entered into the settlement in order to put this issue behind us and enable us to focus our full attention on better serving our mortgage customers," said Gerald L. Baker, chairman of the mortgage company.
But the Justice Department declared victory in the case, the 10th fair- lending suit it has brought in the past four years.
"Loans should be based on risk, not race," said Deval Patrick, assistant attorney general for civil rights. "By changing their practices, Fleet has stepped forward and done the right thing."
Banking lawyers hailed the monitoring approach as a way to offer overages without getting into trouble.
"This settlement provides the first clear indication of what kind of overages practice the bank regulators and enforcement agencies believe are appropriate," said the attorney who represented Fleet, Andrew Sandler, a partner in Washington with the law firm Skadden, Arps, Slate, Meagher & Flom.
Fleet must train all its loan officers in the proper use of overages. The mortgage company also will review each loan, recording all overages and using statistical models to flag cases in which particular loan officers consistently charged minorities higher rates. Officers with repeated problems will forfeit part of their commissions and be subject to monthly monitoring.
"There is no question in my mind that this is what the federal government wants to see going forward," said Paul H. Schieber, a partner at the Philadelphia law firm of Blank, Rome, Comisky & McCauley.
Mr. Baker at Fleet said the company plans to restart its overage program now that the legal complaint is settled. Fleet had halted overages in 1994 when the Federal Reserve Board began reviewing the pricing of 35,000 loans at 33 branches in the New York-New Jersey region.
The settlement requires Fleet to compensate 600 blacks and Hispanics who paid more than the average rate charged to white applicants between August 1993 and June 1994. The payouts will average $6,000 but will go as high as $15,000. Fleet also will spend $200,000 on outreach programs to attract low-income and minority borrowers.
