May 24, 2012 / 10:00 PM / 6 years ago

DOJ receives rare praise in financial crisis cases

WASHINGTON (Reuters) - One part of the U.S. Justice Department has been receiving something in short supply for those investigating conduct tied to the financial crisis: praise.

A unit in the civil rights division focused on discrimination in the housing market has been churning out cases accusing major lenders of charging African-American and Hispanic borrowers higher interest rates than similar white borrowers.

In April, for example, it sued GFI Mortgage Bankers Inc on such grounds for loan activity from 2005 through 2009.

In December, the Justice Department reached a record $335 million settlement with failed mortgage lender Countrywide Financial Corp, now owned by Bank of America Corp, for loans made between 2004 and 2008.

And last year it settled allegations that C&F Mortgage Corp charged more and provided smaller discounts on home loans made to black and Hispanic borrowers, and resolved allegations that Nixon State Bank charged higher prices on unsecured consumer loans made to Hispanic borrowers.

Earlier this month Wells Fargo & Co too disclosed it could face charges under similar laws.

“The Obama administration has done a very good job of trying to target the subprime lenders who were responsible for the financial crisis,” said Peter Romer-Friedman, a lawyer at Cohen Milstein, who is counsel to the nonprofit National Fair Housing Alliance.

“Tom Perez should get a huge amount of credit for his tireless efforts to go after the lenders,” he said, referring to the assistant U.S. attorney general in charge of the civil rights division.

Much of the narrative about the Obama administration’s handling of financial crisis cases has been harsh, with critics arguing that officials have not aggressively held Wall Street accountable for the 2007-2009 financial crisis that plunged the United States into a prolonged recession.

Top administration officials and regulators have said much of the financial crisis was caused by greed and recklessness, not necessarily unlawful conduct.

President Barack Obama announced during his State of the Union address in January the formation of a new mortgage fraud task force that would “help turn the page on an era of recklessness that hurt so many Americans.”

But the civil rights division of the Justice Department has been quietly building their own financial crisis cases for years that have recently started yielding respect.

NEW FAIR LENDING UNIT

The Fair Housing Act and other finance-related civil rights laws have been on the books for decades but there has been little enforcement. Before 2008 the Justice Department brought around two such cases per year, according to DOJ statistics.

Under the Obama administration, the Justice Department created a fair lending unit within the civil rights division and has resolved some 16 cases in the past two years, the DOJ has said.

An interest in enforcing anti-discrimination laws dovetailed with an interest in holding liable conduct that fueled the housing crisis.

“Often with predatory loans there is broad misconduct ... our role is a slice of that, specifically on the fairness of the marketing and of the loan instrument,” John Trasvina, assistant secretary for fair housing at the U.S. Department of Housing and Urban Development, said in an interview.

The cases often come into the Justice Department through referrals from HUD, bank regulators and other agencies, and the tally of referrals suggest the unit’s case load could go up.

Between 2009 and 2011 regulators referred 109 matters to the Justice Department for potential prosecution, the DOJ has said.

“There’s no question they’ve stepped up their commitment to enforcing the fair lending laws,” said John Taylor, who heads the National Community Reinvestment Coalition, which advocates for banking services for underserved communities. “They’ve done a decent job.”

TREATMENT VERSUS IMPACT

As the department has stepped up its enforcement of fair lending laws, it has also turned to a more aggressive interpretation of those laws.

Historically, prosecutors based cases on the intent of a defendant to treat minority borrowers differently, known as “disparate treatment.”

More recent cases have turned to a “disparate impact” theory, which only requires enforcers to show a policy had the effect of disproportionately affecting minority borrowers.

In its case against Countrywide, for example, the DOJ alleged the lender had policies in place that resulted in black and Hispanic borrowers paying higher mortgage fees than white borrowers because it allowed its loan officers to vary the price of a loan based on factors outside of those that were credit-related.

“The cases we’re seeing now are much more driven by statistics,” said Melanie Brody, a lawyer at K&L Gates who represented Countrywide in its settlement but declined to speak specifically about that case.

“There doesn’t seem to be as much underlying investigatory work to support the claims; it’s more based on the analysis of big pools of loan data,” she said. “Using the impact standard -and so forcefully - is definitely a policy shift.”

FORECLOSED PROPERTIES

In another sign that the department’s enforcement efforts could take an additional turn, the fair housing group NFHA filed complaints with HUD alleging violations that differ from previous cases.

The group filed complaints against U.S. Bancorp and Wells Fargo and said it plans to file additional complaints, accusing the banks of maintaining foreclosed properties in white neighborhoods better than those in black or Latino neighborhoods.

A Wells Fargo spokesman said in April the bank was “fair and consistent” in its lending activities. [ID:nL2E8FAHUN] An official for U.S. Bancorp said in most cases the bank was not responsible for the upkeep of most of the properties at issue. [ID:nL3E8FH55K]

Since banks have not historically owned such large numbers of foreclosed homes, such complaints have not previously been made.

HUD has said it is investigating the complaints and could refer the cases to the Justice Department for the department’s action.

“We are aware of NFHA reports, and are looking very closely at them and coordinating with our partners at HUD,” Eric Halperin, who is a special counsel for fair lending at the DOJ, said in an interview.

Reporting By Aruna Viswanatha; Editing by Kenneth Barry

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