WASHINGTON — The Justice Department announced Wednesday that it has reached a $335 million settlement with Countrywide Financial Corp., now owned by Bank of America, in the largest fair lending action in history.
The settlement resolves allegations that Countrywide engaged in a widespread pattern of discrimination against qualified African-American and Hispanic borrowers in their mortgage lending from 2004 to 2008.
The settlement, which is still subject to court approval, alleges that Countrywide charged minority borrowers higher fees and interest rates than non-Hispanic white borrowers in both its retail and wholesale lending. The Justice Department said that the borrowers were charged higher rates because of their race or national origin, not because of borrowers' credit worthiness.
The complaint also alleges that Countrywide steered thousands of minority borrowers into subprime loans when white borrowers with similar credit histories received prime loans.
"Today's settlement makes clear that today's Justice Department will not hesitate to move aggressively in holding lenders, including the nation's largest, accountable for discrimination and financial misconduct," Attorney General Eric Holder said at a press conference Wednesday. "We are committed to protecting the sacred rights and the best interests of the American people."
Nowhere is this more evident, Holder said, than in the civil rights division's fair lending unit. The unit, which the banking industry has complained is overzealous in its pursuit of fair lending cases, has resolved 10 fair lending matters since its formation last year, Holder said. It has seven lawsuits and 10 open investigations that are currently pending, he added.
"This is indicative of the current enforcement expectations, not only of DOJ but of the state AGs and the [Consumer Financial Protection Bureau] and other federal and state agencies," said Andrew Sandler, a partner with the law firm Buckley Sandler LLP in Washington. "2012 will be another challenging year for consumer lenders."
The settlement will provide direct compensation for more than 200,000 African-American and Hispanic borrowers who were allegedly discriminated against. Officials said the discrimination was widespread, spanning more than 180 geographic markets in 41 states, officials said. But the epicenter of the discriminatory practices was California, where 30% of the victims lived.
The case was referred to the Justice Department by the Federal Reserve, which was a key partner in the investigation, Holder said. Holder was joined at the press conference by Fed Governor Sarah Bloom Raskin, as well as officials from the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau.
Countrywide's business strategy was to target African-American and Hispanic markets in order to expand its lending and ultimately gain market dominance in making residential loans in those communities, said Thomas Perez, the assistant attorney general for the Justice Department's civil rights division.
"The core of the allegations and complaint is a simple story," Perez said. "If you were African-American and Latino and you went to Countrywide for a loan and you were qualified, you likely paid more simply because of the color of your skin."
Perez said the investigation was one of the most extensive in the civil rights division's history, and would not be possible without a "critical and close partnership" with bank regulators. It involved the review of more than 2.5 million loans, including data on loan terms and a borrowers' creditworthiness.
Of the more than 200,000 borrowers who were discriminated against, approximately 10,000 were steered into subprime loans when they would have qualified for prime loans, the Justice Department alleged.
In many cases, the victims had no idea they were being discriminated against — and many of them still don't know, Perez said. The Justice Department is in the process of obtaining contact information for the thousands of borrowers, who will be contacted by an approved settlement administrator.
Justice officials acknowledged, however, that many of the borrowers no longer live in the same locations, and said it could take up to two years to find them and award compensation.
The complaint, which alleges violations of the Fair Housing Act and Equal Credit Opportunity Act, involves four claims of discriminatory practices.
The first two claims allege that, between 2004 and 2008, Countrywide allowed its employees to adjust a loan's interest rate and other fees from the set price — based on a borrower's creditworthiness — without providing any guidance or monitoring for fair lending compliance. That resulted in a pattern of higher rates and fees for African-American and Hispanic borrowers, the Justice Department alleged.
The second claim alleges that, between 2004 and 2007, the company gave employees discretion to place an applicant in a subprime loan, even when he qualified for a prime loan. Those borrowers not only faced higher fees and costs — sometimes tens of thousands of dollar more — but also faced prepayment penalties, and were more likely to default or face foreclosure, Perez said.
Finally, the complaint claims that Countrywide routinely violated the law when they required a borrower's spouse -- who was not a loan applicant-- to sign away her right to the home as a condition of approval.
A Bank of America spokesman said Wednesday that the practices in question were limited to Countrywide and were shut down after Bank of America acquired the mortgage lender in 2008.
"We reached this settlement to resolve issues about Countrywide's alleged historic practices that occurred before Bank of America acquired the company. Bank of America's practices are not at issue," said Dan Frahm, a B of A spokesman, in a statement e-mailed to American Banker. "We are committed to fair and equal treatment of all our customers, and will continue to focus on doing what's right for our customers, clients and communities. We discontinued Countrywide products and practices that were not in keeping with our commitment and will continue to resolve and put behind us the remaining Countrywide issues."
At the press conference, Department of Housing and Urban Development Secretary Shaun Donovan said the settlement, which involves loan origination, would in no way constrain or limit the settlement that federal officials and state attorneys general are continuing to negotiate with the top five mortgage servicers.
"These discussions and the investigations that we've done around the servicing violations and problems are one piece of a broader pattern of conduct that led to the housing crisis," Donovan said. "Any settlement discussion that we have will not limit or stop us from pursuing as aggressively as we possibly can all of the remaining issues that led to the crisis."
"The scale of those claims is one small part of potential recoveries that we could have," he added.
Donovan said officials continue to make good progress on the negotiations.
"I would expect that in the very near future we will be able to come forward with more public discussion of exactly where we are on that settlement,"he said.
