with the Department of Justice that it has agreed to pay $3 million in damages to African-American loan applicants who were turned down by a subsidiary bank.
The government charged that loan officers at Deposit Guaranty National Bank of Jackson, Miss., overrode credit scores in favor of white applicants for home improvement loans and applied stricter standards to black applicants with comparable financial histories.
Blacks were three times more likely to be rejected than whites, according to the settlement agreement. The alleged bias occurred at Deposit Guaranty from Jan. 1, 1995, until last year. The Deposit Guaranty name is still on branches in Arkansas, Louisiana, and Mississippi, though they became part of the First American system in May 1998 when Deposit Guaranty Corp. was acquired.
The First American unit denied wrongdoing and said it settled to avoid the cost of litigation. The settlement expense is covered by a reserve in place at the time of the acquisition, according to a First American press release.
First American itself agreed in June to be bought for $6.3 billion by Birmingham, Ala.-based Amsouth Bancorp. That deal is expected to close in the fourth quarter.
The bias case stems from a routine fair-lending examination in 1997 by the Office of the Comptroller of the Currency, which referred the matter in January to the Justice Department.
The OCC determined that Deposit Guaranty lenders "exercised subjective judgments" and "freely overrode the decisions indicated by applicants' credit scores," according to the settlement.
Deposit Guaranty denied 32% of 2,597 home improvement loan applications from African-Americans between Jan. 1, 1995 and Dec. 31, 1997, versus 8.9% of 5,513 white applicants, according the settlement filed in U.S. District Court in Jackson.
Since its takeover of the Mississippi-based banking company, First American pulled all of Deposit Guaranty's home loan applications into a centralized underwriting facility. The settlement agreement detailed how the First American approval process involves frequent internal reviews. Any decision to override a credit score is made by "a small number of high level, management (First American National Bank) personnel."
The bank will turn over to Justice all the home improvement loan applications in question, and after three months, Justice will give the bank a list of applicants to notify that they are eligible for compensation. The number of applicants to be compensated is estimated at 250.
"The Justice Department takes allegations of lending discrimination very seriously and will not hesitate to go after lenders who intentionally discriminate against minorities," said Bill Lann Lee, acting assistant attorney general for civil rights.
First American's attorney, Andrew L. Sandler, said the agreement to settle "has nothing to do with the bank's current lending practices, which the Justice Department and other regulatory agencies have concluded reflect a strong fair lending culture."