The Justice Department, reviving a hotly contested standard for racial discrimination, slapped a record $9 million fine on Albank Financial Corp. Wednesday for allegedly shunning minority communities in its lending.
The case, which the Albany, N.Y.-based thrift company settled, marks the first time in three years that the government has imposed fair-lending sanctions for alleged redlining. Most fair-lending cases have focused on pricing and underwriting, rather than on the geographic scope of marketing.
"We are not asking you to make bad loans," Attorney General Janet Reno said at a press conference. "We are not telling you where to do your business. But don't make decisions based on race or other prohibited factors."
The settlement-the 13th since the department began focusing on fair- lending enforcement in 1992-should remind bankers that the government's lending bias investigations continue, said Andrew L. Sandler, a partner at the Washington office of the Skadden, Arps, Slate, Meagher & Flom law firm.
"We may see the department apply this redlining theory more broadly, including its application to small-business lending," he warned.
The Justice Department last alleged marketing discrimination in a highly publicized case against Maryland's Chevy Chase Federal Savings Bank. Lenders protested that action loudly.
The fine against Albank will fund $55 million in below-market-rate loans and $700,000 worth of home-buyer education.
Albank was referred to the Justice Department in May by the Office of Thrift Supervision. The OTS had uncovered documents in the $3.5 billion- asset thrift's files instructing loan officers not to extend credit in lower Westchester County, N.Y., and the Connecticut cities of Bridgeport, New Haven, Hartford, New Britain, Norwalk, Stamford, and Waterbury. These areas contain significant concentrations of minorities.
OTS found that Albank occasionally deviated from its policy of not lending in those communities-but overwhelmingly to the benefit white borrowers.
High delinquency rates and falling property values-not bias-caused Albank to restrict lending in these areas, said Freling H. Smith, the thrift's senior vice president. Also, the thrift used mortgage brokers, so officials never realized the extent of the minority population in the communities.
"If we had branches in Connecticut, we would have been more aware of the demographic composition of the markets we were reviewing and we would have had a different solution," Mr. Smith said.
"We look very dumb saying in retrospect we should have known that," he added. "But we certainly didn't and we didn't do anything intentionally wrong."
The thrift settled the case to avoid the high costs of litigation, he said.
Albank will make $35 million in below-market-rate loans in the seven Connecticut cities, and $20 million in lower Westchester County. The program will cost $9 million, which is the most any institution has paid out of pocket to settle a fair-lending suit. Chevy Chase's fine was valued at $11 million, but that included $4 million the thrift spent to open three new branches before the settlement was reached.
Most of the 12 other fair-lending cases involve institutions that either charged minorities more for loans or subjected them to more stringent underwriting standards.
In the Chevy Chase case in 1994, the government forced the thrift to open more branches in minority communities-a demand that outraged the banking industry. The Albank settlement did not include branching requirements.
"This is an indication that Justice may be giving up on the idea that branching is part of lending discrimination and should be one of the corrective actions required," said James D. McLaughlin, director of regulatory and trust affairs at the American Bankers Association.