WASHINGTON - Huntington Mortgage Co. agreed Wednesday to spend $420,000 to settle Justice Department charges that it discriminated against black borrowers in Cleveland.
The funds will compensate 117 borrowers who were charged higher up-front fees, known as overages, for their loans, the Justice Department said.
The department also said Wednesday that Security State Bank of Pecos, Tex., agreed to pay $510,000 in damages and penalties to resolve charges that a single loan officer forced Hispanic borrowers to pay higher interest rates than similar white applicants for consumer loans.
The settlements represent a new high-water mark in the government's campaign to eradicate lending bias. This is the first time the department has attacked a bank's overages practice and it is the first time it has examined lending to Hispanic borrowers.
"The message of both of these cases is that lenders need to make sure that they are training their employees about the requirements of fair lending and that they are training their employees on how to treat people fairly," said Paul Hancock, chief of the housing section at the Justice Department.
"There is nothing wrong with discretion," he added. "But you want to make sure they are exercising it in a fair manner because, if not, the employer can be liable."
In the Huntington case, the department said it found more than 300 incidents where the mortgage company lacked legitimate reason for charging blacks higher points and fees.
Examiners from the Office of the Comptroller of the Currency uncovered the problem during a 1993 fair-lending exam and referred it to the department in August 1994.
The Justice Department then conducted its own investigation, reviewing loan files from October 1991 through September 1993. It found that blacks paid loan fees 10 times higher than whites paid.
Huntington Mortgage Co. president R. Frederick Taylor denied any wrongdoing, saying the company aggressively pursues minority applicants.
"The DOJ issues are very limited in scope and technical in nature," Mr. Taylor said. "In the best interests of our shareholders, we've chosen to get on with doing business rather than take additional management time and resources away from growing our business and serving our customers well."
In addition to the monetary settlement, Huntington agreed to implement a program to guard against future lending bias problems. The mortgage company also agreed to collect all loan applications filed during the next three years and to make them available to Justice Department investigators upon request.
In the Security State case, the Justice Department alleged that a single loan officer charged Hispanics higher rates than whites for consumer installment and single-payment loans.
Examiners from the Federal Reserve Bank of Dallas referred the case to the Fed's board of governors, which in turn notified the Justice Department. Investigators from the department confirmed the disparities and entered negotiations with the bank.
Security State president Dudley K. Montgomery said the bank moved to closely monitor the loan officer's performance as soon as regulators notified it of the problem. The settlement documents note that the loan officer has since left the bank.
"It has been the policy at the bank that we do not discriminate, never have and never will," Mr. Montgomery said.
James McLaughlin, director of regulatory affairs at the American Bankers Association, said the settlements finally give bankers some guidance on how to handle overages program. Bankers now know that the Justice Department expects intensive monitoring and oversight of fees charged borrowers, he said.
Banking lawyers have been expecting the department to bring pricing claims.
"It shows a shift in the department that a number of us have been predicting from the standard underwriting case to pricing cases," said Jean Veta, a partner at Covington & Burling law firm in Washington. "Bankers will need to look carefully at their practices. Overages are not per se illegal, but they certainly are a high-risk area."
Private-sector litigants are likely to follow the government's actions, said Andrew Sandler, a partner at Skadden, Arps, Slate, Meagher & Flom in Washington.
"Private litigation in this area follows the government's enforcement focus," he said. "Future private litigation will also focus on pricing issues."