WASHINGTON — A mortgage lender accused of discriminatory lending practices is planning to fight back against a Justice Department lawsuit — a move that may embolden other banks to follow suit.
Justice filed the suite late Monday, alleging that GFI Mortgage Bankers charged minority borrowers higher interest rates and fees based on their race or national origin, not creditworthiness.
It is the latest fair lending suit filed by the agency, which logged an unprecedented amount of fair lending enforcement activity in 2011, including a $335 million settlement with Countrywide for similar violations of the Fair Housing Act and Equal Credit Opportunity Act.
While most banks have quietly settled such claims, a lawyer for GFI said the lender plans to contest the charges. Industry lawyers hope the court battle may clarify the law and undermine Justice Department legal theories that they argue are bogus.
"GFI regrets DOJ's unwillingness to settle this matter on reasonable terms," Andrew Sandler, the chairman of BuckleySandler LLP, which represents the defendants, said in an interview. "It will vigorously defend these legally vulnerable, statistically based disparate impact claims."
The Justice Department has pursued a number of enforcement actions in recent years under the "disparate impact" theory, claiming fair lending violations resulted from policies that had a disparate impact on a group of borrowers, even if the discrimination did not appear to be intentional. It sparked a backlash last year from the banking industry, which said the agency was abusing its authority, misusing legal interpretations to bring claims to court.
Until now, most banks have chosen to settle such claims, leaving very few court decisions on which banks can rely for guidance.
But observers have predicted banks will be more likely to challenge the Justice Department in 2012, frustrated by the increasingly large settlement amounts Justice is seeking and emboldened by the Supreme Court's decision to weigh in on a disparate impact case.
Although that case was ultimately withdrawn, many viewed the high court's decision to hear the case — in the absence of conflicting opinions from lower courts — as a sign that it may question the legal theory.
"There may well be more contested cases, given the perceived vulnerability of the disparate impact theory and the very aggressive Justice Department demands in individual cases," Sandler said.
Ron Glancz, a partner with the Venable law firm in Washington who has represented several banks in DOJ fair lending cases, said litigation would help establish new case law around disparate impact, which had rarely been used in lending cases until recently.
"I think the Justice Department is on weak ground on some of the disparate impact cases they're bringing," said Glancz, who was previously an assistant director in the Justice Department's civil division. "It's totally based on economic research, which in some cases I've seen is flawed. So that's the area where you're going to get some litigation and a court decision — maybe several court decisions — and hopefully clarify the law there, because I think it really needs clarification."
But litigation isn't for everyone, Glancz said. The process is expensive, time-consuming and often impedes other bank business, including branch openings or acquisitions.
"They're willing to fight, but I also think you've got to balance that against the long-term business interests of you need regulatory approvals to do certain things," he said.
The lawsuit, filed in the southern district of New York, alleged that GFI Mortgage — a subsidiary of GFI Capital Resources Group in New York - charged African-American and Hispanic borrowers higher interest rates and fees on mortgages than "similarly situated" white borrowers, from 2005 through at least 2009.
"The disparities, based on race or national origin, are statistically significant, and are unrelated to credit risk or loan characteristic," the agency said in a press release.
The lawsuit also said GFI had a practice of allowing its loan officers to promote products and charge fees in a manner that was unrelated to credit risk while providing them a substantial percentage of the profits generated from each loan - a compensation scheme that provided strong financial incentives for employees to price products in a discriminatory manner, the claim alleged.
During the period when the discrimination occurred, GFI's revenue from its home mortgage loan services increased from $305 million in 2005 to $768 million in 2009, DOJ noted in its press release. The case resulted from a referral by the Department of Housing and Urban Development in 2010.
"Charging people more for home loans simply because of their race or national origin — as we have alleged in our complaint against GFI — is illegal," Thomas E. Perez, the assistant attorney general for the civil rights division, said in the release. "The Justice Department will act aggressively to ensure that all people have equal access to credit and a level playing field. For that reason, vigorous enforcement of fair lending laws remains a top priority."