In the early 1990s, the availability of home loans to minorities got the attention of regulators.
Now regulators have turned to the way home loans are priced. And they are particularly concerned with above-normal fees and interest rates charged to minority borrowers. These charges are known as overages.
At the same time, class-action lawyers have been taking aim at lenders who reward brokers for charging fees above those for which borrowers have qualified.
Here's an example of how an overage works: A lender posts a current rate of 8% and one point on a 30-year, fixed-rate loan to borrowers who qualify for conventional loans.
But instead of charging the standard rate, a loan officer or broker tells the borrower that the mortgage has a two-point origination fee or an 8.5% interest rate. The borrower accepts.
By charging a two-point fee on a $100,000 loan, the lender makes an additional $1,000. And if the loan's interest rate is closed at 8.5% rather than 8%, the lender makes an additional $1,500 upon selling the loan into the secondary market. The lender generally splits the extra profits with the loan officer or broker.
While the practice may seem questionable from a consumer point of view, it is not in itself illegal. The practice has come under fire from different angles from class-action lawyers and the Justice Department.
Last week, the American Banker learned that the Justice Department was investigating whether the practice of charging above-market rates was discriminatory because the charges were levied more often on minorities than on others.
"This is a complaint you hear about all the time," said Allen J. Fishbein, general counsel to the Center for Community Change. "It is just difficult to know whether it is just (a salesman's) instinct or if it reflects a pattern at the institution."
Earlier this month, Ford Motor Co.'s financial services unit, Associates Corporation of America, Dallas, and GE Capital Mortgage Services Inc., Elkins Park, Pa., were targeted by class-action lawyers for rewarding brokers who bring in premium-priced loans.
Plaintiff's lawyers are keeping their complaints narrow. They are concentrating on finance companies, apparently because they believe overages have been larger and more widespread at those companies.
They say that, by paying extra fees, lenders are encouraging mortgage brokers to break their fiduciary responsibility to borrowers. The lawyers make no mention of racial discrimination in their class actions, but some say privately that minorities are generally the targets of overages.
Regulators first expressed their concerns regarding overages nearly a year ago, when the Federal Reserve and the Office of the Comptroller of the Currency warned lenders that overages could potentially discriminate against minorities. The Fed urged lenders to "carefully review your policy" regarding overages.
Since the warning, the practice of charging overages has eased slightly, according to Carl D. Jacobs & Associates, a Woodland Hills, Calif., consultancy. Carl D. Jacobs, president, said that last year 38% of lenders paid loan officers for writing loans with overages, down from 43%