As a House panel gathers testimony today on whether pricing data required by the Home Mortgage Disclosure Act reveals discrimination, the first lawsuits against mortgage lenders are rolling in.
The National Association for the Advancement of Colored People filed a class action July 11 against a dozen mortgage lenders — including Ameriquest Mortgage Co., HSBC Finance Corp., and Washington Mutual Inc. — alleging blacks received higher-interest subprime loans than whites.
Days later three African-American borrowers from Boston filed a lawsuit that seeks more than $100 million and accuses Countrywide Home Loans Inc. and its subprime subsidiary, Full Spectrum Lending Inc., of racial discrimination.
Bankers had feared such lawsuits would result after the Federal Reserve Board in 2002 said that in 2004 lenders would start to report pricing data for certain higher-priced mortgages.
"I think we'll see a number of class actions filed over the next six months to a year," said Andrew Sandler, a partner at Skadden, Arps, Slate, Meagher & Flom LLP representing several lenders targeted in the NAACP suit. "This is exactly what the industry was concerned was going to happen when the regulators decided to publish this data."
But even though private lawsuits are being filed, so far federal regulators have not used the data as the basis for many enforcement actions — something the House Financial Services' oversight subcommittee plans to investigate. Lawmakers will hear from 13 witnesses, many of whom are expected to say that regulators are not rigorously policing lending bias.
"When it comes to fair-lending enforcement, it's where's Waldo?" said John Taylor, the president of the National Community Reinvestment Coalition and a scheduled witness. "If there are not ramifications, then what's the downside to people practicing … [discriminatory] practices?"
At today's hearing, officials from the five bank, thrift, and credit union regulatory agencies are expected to defend the current system. Consumer advocates are expected to argue for additional disclosures such as pricing data on lower-cost loans and such details as a borrower's credit score.
Bill Himpler, the executive vice president of federal affairs at the American Financial Services Association and the industry's witness, said lenders fear reporting additional data would jeopardize borrowers' privacy and compromise lenders' pricing models.
"Our goal for the hearing is to again explain to Congress that HMDA's working; the regulators have analyzed a couple years' of data; have made referrals" to the Justice Department; "investigations are going forward; the process is working," Mr. Himpler said in an interview. "We are in a time right now where we have some increased cases of defaults, and the last thing we need right now is to prejudge these cases."
From Jan. 1, 2004, to June 30, 2007, bank regulators referred 134 potential discrimination cases to the Justice Department — 118 from the Federal Deposit Insurance Corp., 15 from the Fed, one from the Office of Thrift Supervision, and none from the Office of Comptroller of the Currency.
The Justice Department has yet to bring a case based on these referrals. It is sending a representative to the hearing, as is the Department of Housing and Urban Development, which just created an office devoted to analyzing HMDA data and investigating lending discrimination.
Kim Kendrick, HUD's assistant secretary for fair housing and equal opportunity, said the office was started in response to a spike in borrower complaints. She said the office has several investigations based on HMDA pricing data under way and some are close to conclusion.
"Probably the more people get familiar with the data, they will be able to analyze the cases more quickly, just as we will," said Ms. Kendrick, who is scheduled to testify at today's hearing.
The office is focusing on nonbank lenders now, but Ms. Kendrick would not rule out taking action against banks. "Nobody is off-limits," she said.
In fact, HUD settled a case with First Indiana Bank for $100,000 in June over allegations of discrimination in mortgage lending. Mr. Taylor's group filed the complaint that started that investigation.
But in an interview with Ms. Kendrick, Bryan Greene, HUD's deputy assistant secretary for enforcement and programs, said pricing data alone cannot make an enforcement case.
"The data alone is not going to tell you if they are discriminating because the data doesn't have key information on who gets the loan and at what price so the data that we receive helps us to target which lenders we might pursue," he said.
The NAACP lawsuit charges the 12 lenders with "institutionalized systemic racism," but it provides no evidence that minorities were charged more than white borrowers.
The group recently dropped Citigroup Inc. from its list of defendants. The NAACP did not return numerous calls, but Legal Times reported the group backed off after Citigroup agreed to engage in "serious discussions."
The suit against Countrywide claims black borrowers were more than three times as likely as whites to get a higher-cost mortgage and more than two times as likely to receive a high-cost refinancing.
In December 2006, then-New York Attorney General Eliot Spitzer cut a deal with Countrywide in the first case based on the 2004 HMDA data. The lender did not pay a fine but agreed to take several steps, including setting tighter oversight of mortgage brokers and spending $3 million on a consumer education program.
A wave of suits were filed in the early 1990s after HMDA data showed banks were more inclined to deny mortgages to minorities. None of those cases succeeded, but the Justice Department did settle some cases with lenders.
Plaintiffs may have a hard time winning class-action status for these cases, industry sources said, because the loans were made on an individual basis.
"Lenders don't make loans to groups," said James Ballentine, director of housing and economic development for the American Bankers Association. "They make loans to individuals."
Mr. Sandler said: "I think they will be vulnerable on class certification. And if class certification is defeated in the early stages, there may not be a significant number of subsequent such cases filed."
Eric Halperin, director of the Washington office for the Center for Responsible Lending, disagreed.
"I don't think uniformity affects the probability of class-action cases," he said. "I do not think anything about lending makes it less amenable to class-action lawsuits. As long as you're not talking about an isolated occurrence but a widespread occurrence, then you could bring a class action."
Some argue pricing differences are driven by numerous factors, including a borrower's credit score and the loan-to-value ratio.
"When you take a look at credit-related data, each individual has their own credit, each individual has their own loan, each individual has their own needs," said Joe Lynyak, a partner at Buckley Kolar LLP. "When you apply credit data to the HMDA data, you see an entirely different picture of how people are treated and whether they are treated fairly."
But a 2006 Center for Responsible Lending study cited in the NAACP suit concluded that even when income and credit risk were accounted for, African-Americans were still 31% likelier than whites to receive higher-rate subprime loans.
