In a case with broad ramifications for the home loan industry, a California mortgage company has settled government charges of racial bias in loans made through brokers.
Long Beach Mortgage Co. agreed to pay $4 million to settle charges that it discriminated through its own loan officers and outside brokers.
The case marks the first time the Justice Department has held mortgage lender liable for pricing discrimination involving independent brokers. Banks and other mortgage lenders across the country have stepped up their use of brokers markedly in recent years.
The case also is the first against an independent mortgage bank and the first to cite discrimination against women and the elderly.
"Lending decisions, including the price of a loan, should be based on the qualifications of the borrower and the resulting risk to the lender," Deval Patrick, the assistant attorney general for civil rights, said in a prepared statement. "Such decisions should not be based in any way on race, gender, national origin, or age."
Long Beach, a former thrift that converted to a mortgage company in 1994, did not admit any wrongdoing. But it agreed to spend $2 million to compensate borrowers who received high-rate loans directly from the lender and $1 million for those who got high-rate loans through independent brokers. About 1,200 minority, female, and elderly consumers are expected to share in the settlement.
Long Beach, which concentrates on the subprime loan market, also will monitor is wholesale lending portfolio for fair-lending compliance and devote $1 million to homebuyer education programs administered by civil rights groups.
"We believe there is no reliable evidence that substantiates any charge of discrimination," Long Beach president Jack Mayesh said. "This company has a very strong policy against discrimination."
Mr. Mayesh questioned the statistical study on which the Justice Department based its case. Among other things, he said, the report assumed consumers would hold a loan for only four years, which exaggerated the cost of points paid by borrowers. Mr. Mayesh said Long Beach settled to avoid the expense of a trial.
The wholesale lending aspect of this case has garnered significant attention during the past three months. Brokering has become big business for lenders. About half of all new mortgages - approximately $325 billion a year - pass through brokers. Although exact figures are not available, bank-owned mortgage companies are getting an increasing share of their business from independent brokers.
Banking lawyers said the settlement could radically reshape this business.
"The effects of this case are gargantuan," said Thomas Vartanian, a partner at the Washington law firm of Fried, Frank, Harris, Shriver & Jacobson. Lenders, fearing the added responsibility of policing brokers, might abandon the wholesale mortgage business altogether, he said.
Neither Justice's complaint or the settlement explain how a mortgage bank can comply with this new interpretation of the law, according to Andrew Sandler, a partner at the Washington law firm of Skadden, Arps, Slate, Meagher & Flom.
Paul Hancock, chief of the housing section at the Justice Department, said these lawyers are overreacting. The settlement simply prevents lenders from discriminating in any mortgage that it underwrites, regardless of whether it was referred by a loan officer or a broker.
"I think there is a lot of misinformation on what this case is about," he said. "This does not address the purchase of loans. It involves the making of loans. There is nothing innovative. You are responsible for the loans you make."
Still, trade group officials were unsure what to make of the deal. "This is all still up in the air," said Robert Rowe, regulatory counsel at the Independent Bankers Association of America.
"It is hard to know what changes to make yet," agreed Steve Zeisel, senior counsel at the Consumer Bankers Association.
The settlement also requires Long Beach to establish two monitoring systems. One will concentrate on retail mortgages. The company will create a statistical model to ensure loan officers do not consistently charge higher rates and more points to minorities. This practice, known as overages, was at a the center of three recent Justice Department settlements.
Long Beach also will establish a special fair-lending compliance committee to oversee the statistical testing and to punish offending loan officers by either reducing their commissions or placing them on suspension.
On the wholesale side, Long Beach will offer fair-lending training to all brokers it works with. Also, its contracts will state that the price brokers charge for loans should have nothing to do with the consumer's race. Rather, they should reflect the risk of default.
The settlement and suit were filed in U.S. District Court in Los Angeles.
