WASHINGTON - The recent settlement of an insurance discrimination suit brought by the Justice Department has raised new fair-lending fears among advocates of the banking industry.
Industry supporters said the case has advanced two new theories that could directly affect banks accused of violating the Fair Housing Act.
The $16 million settlement with American Family Mutual Insurance Co. was reached March 30.
Banking advocates are content with some its terms. These include requirements that the insurer reimburse minorities who were denied policies because of race, advertise in African-American newspapers, and pay attorney fees.
They said, however, that the Justice Department went too far when it required the insurer to compensate people who said they didn't apply for insurance because they knew they'd be rejected. This notion, known as the frustrated applicant theory, could easily be applied to banks accused of unfairly rejecting minority loan applicants, they said.
The department also crossed the line, bank advocates said, when it required American Family to alter its underwriting standards. This interference with underwriting standards especially worried banking attorneys, who said there is nothing to stop the department from trying to change mortgage underwriting standards in a fair-lending case.
Justice Department officials, however, said bankers have nothing to fear. First, they said the frustrated applicant payments, which are limited to $1,000 a person, are meant for people who were given unmistakable signals that because of their race they should not apply.
"It has to be based on objective information that it would have been futile to get insurance," the official said. "It is not designed to be an easy standard to meet."
Also, the official said, the department doesn't believe banks have problems with their underwriting standards. Rather, the problems are with applying the standard equally to all people.
"This shouldn't be read as a signal to the lending industry that the Department of Justice is about to challenge the underwriting process for loans," the official said. "It certainly isn't meant to send that signal."
Andrew Sandler, a partner at Skadden, Arps, Slate, Meagher & Flom, said bankers shouldn't take much comfort from the department's assurances.
"The history has been that the department seeks to push the window through its consent decrees," Mr. Sandler said. "This would appear to be an extension of that trend."
The frustrated-applicant theory has never been applied to a Fair Housing Act case before, he said. And, the consent decree requires an "unprecedented" amount of interference with underwriting standards, he said.
"That should be of concern not only to the mortgage lending industry, but also to all engaged in extending credit to the public," he said.
Tom Vartanian, a partner at Fried, Frank, Harris, Shriver & Jacobson, said he shares many of the same worries.
"Clearly if you are in the government, you'd like to create precedents that you can refer future targets to," Mr. Vartanian said. "To the extent these kind of predicates are established as benchmarks, they become the standards the government will point to."
Also, private civil rights groups will expect similar terms when they settle their fair-lending cases, he said.
"It means there'll be more litigation," Mr. Vartanian said. "The damages will be higher. And the stakes will be higher. There is a dramatic ripple effect to extension of the law."
But, not everyone is so nervous.
"I think it is part and parcel of more fair-lending enforcement that is still sorting itself out," New York attorney Warren Traiger said. "But in and of itself it doesn't frighten me, because the actor (American Family) was so bad."
