Industry leaders want federal regulators to decide whether banks are responsible for lending-bias violations committed by independent brokers.
"The industry can operate under almost any set of rules as long as there are rules," said one trade group official, "but it is very hard to operate when you don't have any rules."
"We want to bring the regulators in for discussions," said Kay Kinney, executive vice president of the National Association of Mortgage Brokers. "They ought to be consulted about this because what Justice is talking about is really a price-capping scheme, which is an issue the agencies should deal with."
Mortgage brokering has become big business. An estimated 50% of all new mortgages - about $325 billion a year - pass through brokers. Although exact figures are unavailable, bank-owned mortgage companies are getting an increasing share of their business from third-party brokers.
Industry trade groups are worried about the Justice Department's investigation of Long Beach Mortgage Co. The Justice Department alleges that Long Beach charged minority borrowers higher rates and more points than comparable white borrowers, even though independent brokers set the prices for the loans.
According to the department's legal theory, the mortgage bank is ultimately responsible for the broker's pricing practices because it folds these loans into its overall portfolio and it controls the terms of each mortgage.
The Justice Department has threatened twice in the past three months to sue the California mortgage wholesaler, backing off each time.
Industry officials said the department's standard would be impossible to meet. Lenders could reject loans from brokers who charge higher rates, but would then face charges that they discriminate against qualified borrowers, according to industry sources. Lenders also could order brokers to lower their rates, but that could violate the antitrust laws.
"Every one of these solutions creates a problem," a lawyer familiar with the case said.
But a Justice Department official disagreed. "Refusing to take exorbitantly priced loans does not mean you have to cap prices or violate the antitrust laws," the official said.
The American Bankers Association, America's Community Bankers, the Consumer Bankers Association, the National Association of Mortgage Brokers, and the Consumer Mortgage Coalition met informally last week with Long Beach's lawyers at the Washington firm of Kirkpatrick & Lockhart. The groups have not agreed to any joint action, but may ask the Federal Financial Institutions Examination Council or a 10-agency fair-lending task force to decide whether banks are responsible for such violations, sources said.
The Justice Department had threatened that it would file a suit against Long Beach on July 8, prompting the Consumer Bankers Association and other groups to alert members.
But lawyers for Long Beach and the Justice Department agreed on Friday to a "10-day cooling-off period" to allow both sides to reassess their positions. Both parties have been meeting periodically since, trying to work out a deal.
