Bankers shouldn't take much solace from the Justice Department's decision last month to drop a fair-lending probe of Barnett Banks Inc.
Banking lawyers and civil rights activists said the move foreshadows more litigation rather than less.
The Justice Department asked the Fed more than 15 months ago to reject a Barnett acquisition on fair-lending grounds, indicating that the government planned to charge the bank with violating the Fair Housing and Equal Credit Opportunity acts.
But the lawsuit never materialized. Instead, after spending hundreds of thousands of dollars investigating the allegations, the department sent Barnett a letter last month formally ending the probe.
Still, experts disagree over who will bring the fair-lending cases of the future. Some sources expect the Justice Department to return full throttle, while others said the private bar will pick up where the government has left off.
"I am reasonably confident that they will continue to pursue the matters currently under investigation, even if it means bringing a lot of suits during an election year," said Richard Ritter, a former Justice Department prosecutor who is now a fair-lending consultant.
But Mr. Ritter said he is worried that the department won't bring any more cases involving discrimination in underwriting standards, the central issue in the Barnett probe, preferring to focus on overages and pricing issues instead. These cases are less controversial and easier to prove, he said.
The Justice Department also may be going soft, Mr. Ritter said. Until the Barnett case, the government pursued banks even if they tried to repair the fair-lending problems. For example, the department did not let Chevy Chase Federal Savings Bank off the hook although the Maryland bank opened branches in underserved market areas. With Barnett, the department gave the bank credit for corrective measures taken after the investigation began.
John Taylor, president of the National Community Reinvestment Coalition, said he also expects further prosecutions. "We'll have our ear to the ground to find out what happens next," he said.
The banking industry isn't home free if these observers are wrong. Banking lawyers said the Justice Department's departure would open the door for private litigants to latch onto underwriting cases.
Prior settlements with Justice have established de facto precedents that could cost a bank a mint to defeat in court, warned James D. McLaughlin, director of agency relations at the American Bankers Association.
"Justice doesn't need to engage in a lot of suits," Mr. McLaughlin said. "It can stake out a couple of issues and get the institutions to settle. That establishes the precedent. The private bar can take over from there."
But do these cases establish a precedent the private bar could exploit in a post-Barnett world?
Paul Schieber, a partner at Blank, Rome, Comisky & McCauley in Philadelphia, does not think so.
"As a defending attorney I am not scared out of my mind," he said. "There are plenty of unsettled issues here, and a reasonable court may have concluded that if these cases went to trial the banks would have won."
But he said he expects civil rights activists to file class-action suits. The activists, however, said they need more ammunition from Justice.
John Relman, director of the fair-housing project at the Washington Lawyers Committee for Civil Rights and Urban Affairs, said Justice needs to prosecute cases like the one dropped against Barnett.
"They shouldn't be in the business of opening up new areas of the law and then closing up shop," said Mr. Relman, who filed a class-action suit in September against NationsBank Corp. alleging discriminatory underwriting practices
The Justice Department should treat lending bias like it handles employment discrimination cases, he said, adding that it should keep bringing basic cases while also unearthing new legal theories.
So what's the bottom line? Lawyers agree that bankers still must take fair-lending seriously because if the government doesn't come after you, a civil rights group might.
