THE ATTORNEY GENERAL'S
2002 ANNUAL REPORT TO CONGRESS
PURSUANT TO THE
EQUAL CREDIT OPPORTUNITY ACT
AMENDMENTS OF 1976
R. ALEXANDER ACOSTA
ASSISTANT ATTORNEY GENERAL
This report is submitted pursuant to Section 1691f of the Equal Credit Opportunity Act, as amended, regarding the activities of the Department of Justice under the statute. This report covers the 2002 calendar year.
In 1996, upon the recommendation of the General Accounting Office, the Department of Justice provided guidance to the bank regulatory agencies on the characteristics of a referable pattern or practice of discrimination. In this guidance memorandum, we described the distinction between referrals that we would return to
the agency for administrative resolution and those we would pursue upon referral. Referrals that would likely be returned have the followings characteristics: (1) the practice has ceased and there is little chance that it will be repeated; and (2) the
violation may have been accidental or arose from ignorance of the law's more technical requirements, such as spousal signature violations and minor price breaks for certain age groups not entitled to preferential treatment. The overwhelming majority of
referrals received this year fall into this category.
There were a total of 42 fair lending referrals from the federal regulatory agencies during the year. This marks the highest number of referrals we have received and is primarily attributable to the FDIC referring 30 cases which were returned for administrative resolution. By comparison, we received only 5 referrals in each of the two previous years. During 2002, 33 referrals were received from the Federal Deposit Insurance Corporation (FDIC); 6 from the Federal Reserve Board (FRB); 2 from Department of Housing and Urban Development (HUD); and 1 from the Office of the Comptroller of the Currency (OCC). As of January 2003, 36 of these referrals had been
returned to the agencies for administrative resolution. We continued to investigate the allegations in 3 FDIC referrals, 2 FRB referrals and 1 HUD referral. These referrals are described (by agency) below:
Federal Deposit Insurance Corporation
The FDIC made 33 referrals in 2002. As described below, 30 of these referrals were returned for administrative resolution. Twenty of the FDIC's referrals involved allegations of marital status discrimination, where the lender either failed to consider the
joint qualifications of unmarried applicants applying jointly, while doing so for married applicants applying jointly, or it improperly required spousal signatures to guarantee the loan when the individual spouse would have independently qualified for the loan. The
latter requirement violates the ECOA's prohibition against marital status discrimination where the individual applicant qualifies for a loan under the creditor's standards of creditworthiness. In each case, the bank revised its lending policy and has expressed
willingness to take appropriate corrective action for any persons who were aggrieved by the discriminatory policy. Ten of the referrals involved allegations of age discrimination where a lender provided preferential treatment to persons in age groups not entitled to
preferential treatment. Each of these 30 referrals involved technical violations that were easily corrected by agency action so we returned them for administrative resolution.
With respect to the remaining three referrals still under review: one involved a bank that had been originally chartered to meet the needs of the Korean-American community outside a southern city. FDIC examiners believed that the bank was not serving the general population in the lender's service area. The second involved
spousal signature violations which, unlike the 20 referrals mentioned above, may have a large number of victims. The third involved a bank's utilization of underwriting standards of an investor which treated public assistance, foster care, and workers
compensation income in a discriminatory fashion.
Federal Reserve Board
The FRB made six referrals during the year. Four of these referrals were returned for administrative resolution. Two of these returned referrals involved banks aggregating income for married joint applicants but refusing to aggregate income for unmarried joint applicants. The other two involved impermissible spousal guarantees
With respect to the remaining two investigations which are still under review, one involved allegations of excluding or discouraging applications from potential credit applicants in large numbers of minority census tracts in two Midwestern cities. The other involved allegations of gender discrimination in underwriting requirements.
Office of the Comptroller of the Currency
The OCC made one referral during 2002. It involved allegations that a lender impermissibly used age in a scoring model that was not empirically derived. We returned this referral for administrative closure in light of the fact that the bank developed a new, empirically derived, scoring model and there were no identified
Office of Thrift Supervision
The OTS made no referrals in 2002.
Department of Housing and Urban Development
HUD made two referrals during 2002. The first referral alleged that a Washington, D.C. area lender steered African American and Hispanic borrowers to FHA insured loan products and discriminated in the terms and conditions of the loans. This referral was primarily based on testing evidence which was nearly five years old at
the time of referral. We found that there was insufficient evidence to warrant an enforcement action and returned the referral to HUD. The second referral involves allegations of discrimination against Hispanics in the financing of mobile homes. We are currently investigating these allegations.
1. In July 2002, pursuant to a 2001 referral from the OTS, we filed a complaint and settlement agreement in the Eastern District of New York against Fidelity Federal
Bank, fsb ("Fidelity") of Glendale, California alleging a pattern or practice of discrimination in its subprime credit programs in violation of the ECOA. Fidelity entered the subprime credit market in 1997 as owner and originator of subprime credit cards
marketed and serviced by third parties. The complaint alleged that Fidelity discriminated based on national origin by engaging in abusive collection practices in its credit card program which harassed customers on the basis on their Hispanic national
origin. It further alleged that Fidelity, through its relationship with these third parties, failed to issue credit cards in compliance with the ECOA. For example, the underwriting criteria utilized by Fidelity in one of its credit card programs provided less advantageous credit terms to persons who received public assistance and/or such persons were steered to a higher interest installment loan program provided by the third party.
Under the terms of the settlement agreement, Fidelity agreed to provide $1.6 million dollars to compensate the victims of these violations and to fund a Consumer Education Program. Fidelity will also implement a comprehensive Compliance and Risk Management Program and will provide fair lending training for all employees engaged
in credit card program activities.
2. In December 2002, we filed a complaint and proposed consent order in the Northern District of Illinois against Mid America Bank, fsb alleging that Mid America unlawfully failed to market and provide its lending products and services to predominantly African American and Hispanic neighborhoods in Chicago, a practice
known as redlining, in violation of the Fair Housing Act and the ECOA. Mid America, a federally chartered savings and loan association, is the largest independent thrift institution in the Chicago metropolitan area and the second largest in Illinois. The
complaint alleged that the 34-branch Mid America has never opened a full-service branch office in a census tract with a majority African American or majority African American/Hispanic population, despite opening or acquiring 20 new branch offices between 1994 and early 2002. The complaint also alleged that the Bank made nearly
$6 billion in single-family residential real-estate loans between 1996 and 2000, but that only 1% of that amount went to census tracts with majority African American populations and only 2.75% to majority African American/Hispanic census tracts combined. The complaint further alleged that Mid America, until December 2001,
defined its service area in an unusually restrictive way that excluded most minority neighborhoods. Additionally,the complaint alleged that although Mid America solicited and funded a large number of loans outside its defined service area, those loans also
were made primarily to residents of predominantly white census tracts.
Under the settlement, approved by the court in January 2003, Mid America will open two new branch offices in the allegedly redlined areas and invest $10 million over five years in a special financing program, under which it will offer residents of the
redlined areas home mortgages and other residential real estate-related loan products on more favorable terms than would normally be provided or provide down payment or closing cost assistance. Mid America will also assess the home mortgage and other
residential real estate-related credit needs of the redlined areas and develop an action plan by which the Bank can further improve its services and products; it will conduct a targeted advertising program to generate significant numbers of loan applications from
qualified residents of the redlined areas; and pay a minimum of $500,000 to develop and implement a comprehensive homebuyer education and counseling program for residents of the redlined areas.
3. In 2002, we initiated pre-suit negotiations in the Department's first fair lending case to allege discrimination in business lending as well as home refinance and improvement lending. It involves allegations that a major lender has engaged in a
pattern or practice of denying equal credit opportunity to persons and businesses in predominantly African-American geographic areas, primarily by avoiding and refusing to do business in minority neighborhoods, while continually expanding its banking
business in surrounding white areas (a practice commonly known as redlining).
We continued to develop investigations of subprime lenders that
disproportionately target high priced loan products to minority and elderly borrowers residing in the nation's central cities. Our central concern in these investigations is possible price discrimination based on race, ethnicity, sex, or age. However, each of these lenders may also be engaging in deceptive sales practices. We are seeking to determine whether such practices, if they exist, are unlawfully being made to fall more heavily on borrowers who are protected by the fair lending laws.
In addition to subprime lending investigations, we continue to pursue investigations in several other lending areas. In addition to the investigations referenced above, we have initiated a joint investigation with a State Attorney General's Office into automobile financing practices to determine whether dealerships discriminate in imposing higher finance charges for minority borrowers.
We are continuing to investigate a 2001 referral in which FDIC concluded that a bank was charging Hispanic borrowers higher interest rates than it charged non-Hispanic borrowers for consumer loans secured by vehicles.
IV. OTHER ACTIVITIES
We continue to participate in an interagency task force convened by the Federal Reserve Board, with HUD, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Trade Commission (FTC), and the National Credit Union Association to discuss fair lending issues and the activities of the various agencies.
During the year, Division representatives continued an active program of speaking to lenders and industry associations, as well as advocacy groups and consumer organizations throughout the country, on our enforcement policies and activities.
Document Posted: 11/14/03