Financial Group Inc. violated fair-lending laws by charging minorities higher loan origination fees and interest rates. The Federal Reserve disclosed the investigation in its Nov. 14 order giving Fleet permission to acquire Shawmut National Corp., a $3.6 billion deal that would create an $86 billion-asset bank operating from Maine to New York. This approval marks the first time the Fed has allowed a merger to proceed even though one of the banks is suspected of violating fair-lending laws, several experts said Wednesday. The Fed's 90-page approval also warns bankers that they risk prosecution if employees are allowed to boost their pay by charging some people higher rates or fees. "These kinds of cases are basically saying to bankers that if you want to negotiate rates, you've got to come up with a mechanism that does not disadvantage minorities who may not be as prone to negotiate," said Thomas Vartanian, a partner at Fried, Frank, Harris, Shriver & Jacobson here. The Fed said it found problems at Fleet dating back to 1993 at two offices of its nonbank mortgage subsidiary. Fleet stopped using overages - rewards to loan officers for securing a high rate or extra points from borrowers - once the Fed investigation began, and agreed not to reinstitute the reward system without prior central bank approval. Fleet senior vice president James Mahoney declined to comment on the Justice Department investigation. said the bank expects to resolve the case quickly. He declined to elaborate. Some industry observers said the Fed's decision to approve the merger, which the banks are aiming to complete by yearend, indicates a shift in the central bank's fair-lending policy. "It represents yet again a backing off of a position that the Fed took in Shawmut originally," said Howard Adler, a partner at Gibson, Dunn & Crutcher in Washington. The Fed rejected Shawmut's effort in November 1993 to acquire New Dartmouth Bank because pending lending-bias charges reflected poorly on the institution's management. Many fair-lending experts said the case established a precedent that banks under investigation would not be allowed to expand. Mr. Adler said that precedent is now dead. "It really sends a signal that - in terms of merger approvals - fair lending is not the absolute inhibitor that it looked to be when it first surfaced on everyone's radar," he said. Allen Fishbein, general counsel at the Center for Community Change, agreed the Fed formerly considered a civil rights problem as a "monkey wrench" that would prevent a transaction from going forward. "We are concerned that might no longer be the case, and that the size and relative importance of the merger now determines how civil rights issues are addressed within an order," he said. "That would be an unfortunate turn of events." Steven Zeisel, senior counsel at the Consumer Bankers Association, said the Fed acted properly. "It would be inappropriate for the Fed to treat this as more than it is and somehow cause it to delay a huge corporate merger," Mr. Zeisel said. The order also shows a new level of cooperation between the Fed and Justice, Mr. Vartanian said. Relations between the two had deteriorated significantly last year when the Fed approved an acquisition by Barnett Banks Inc. despite a Justice Department probe. The Fed, unlike in the Fleet case, said it saw no evidence of discrimination in the Barnett case. In its 90-page order, the Fed generally praised Fleet's community reinvestment record. It said the bank has vastly increased its number of home loans to minorities and operates numerous special mortgage programs. Responding to concerns from community activists who feared losing their hometown branches, the Fed is requiring Fleet to report quarterly on the economic impact of any planned branch closings. The Fed declined to consider allegations that Fleet's mortgage company violated lending and debt-collection rules in Michigan. These charges are part of a pending civil suit, which would provide the plaintiffs compensation for any wrongdoing, the Fed noted.
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