THE ATTORNEY GENERAL'S
2005 ANNUAL REPORT TO CONGRESS
PURSUANT TO THE
EQUAL CREDIT OPPORTUNITY ACT
AMENDMENTS OF 1976
WAN J. KIM
ASSISTANT ATTORNEY GENERAL
MARCH 7, 2006
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 2005 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 38 fair lending referrals involving potential ECOA claims from the federal regulatory agencies during the year 2005. As of January 2006, 33 of these referrals had been returned to the agencies for administrative resolution. We continue to investigate the allegations in five of the 2005 referrals, three from the FDIC, one from the Federal Reserve Board, and one from HUD. The referrals are described (by agency) below:
Federal Deposit Insurance Corporation
The FDIC made 35 referrals in 2005. As described below, 32 of these referrals were returned for administrative resolution. Fourteen of the referrals involved allegations of age discrimination where a lender either provided preferential treatment to persons in age groups not entitled to preferential treatment or improperly considered age in a credit scoring system. Eighteen of the FDIC's referrals involved allegations of marital status discrimination, where the lender improperly required spousal signatures to guarantee the loan when the individual spouse should have independently qualified for the loan under the creditor's standards of creditworthiness. In each of these cases, the bank revised its lending policy and expressed willingness to take appropriate corrective action for any persons who were aggrieved by the discriminatory policy. Each of these 32 referrals was returned to the agency for administrative resolution.
At the end of the calendar year 2005, we continued to review the three remaining referrals, which involves allegations that a lender: (1) discriminated on the basis of age by improperly considered age in a credit scoring system; (2) discriminated on the basis of marital status by charging co-applicants for a loan, who were not husband and wife, higher interest rates than similarly situated spousal co-applicants; and (3) discriminated on the basis of race in business lending. (1)
Federal Reserve Board
The FRB made two referrals in 2005. One of the referrals involved allegations of marital status discrimination, where the lender improperly required spousal signatures to guarantee the loan when the individual spouse should have independently qualified for the loan under the creditor's standard of creditworthiness. This referral was returned to the agency for administrative resolution.
At the end of the calendar year 2005, we continued to review the one remaining referral, which involves allegations that a lender discriminated on the basis of marital status by charging co-applicants for a loan who were not husband wife higher interest rates than similarly-situated spousal co-applicants.
The Department of Housing and Urban Development
HUD made one referral in 2005. It involves allegations that the lender discriminated against African Americans by targeting them for "predatory loans" with high fees and interest rates. We continue to review the referral. (2)
Office of Thrift Supervision
The OTS made no referrals during the year.
Office of the Comptroller of the Currency
The OCC made no referrals during the year.
National Credit Union Administration
The NCUA made no referrals during the year.
1. In 2005, we initiated pre-suit negotiations in cases alleging that two automobile dealerships have engaged in similar patterns or practices of discrimination, over a period of years, by charging African-American applicants for automobile loans higher interest rates than similarly-situated non-African-American applicants for such loans. Our investigations into these matters were conducted jointly with a State Attorney General's office.
2. In late 2005, we notified a lender that the Division had authorized the filing of a case alleging that the lender has engaged in a pattern or practice of denying equal credit opportunity, over a period of years, to persons and businesses in predominantly minority neighborhoods in a major metropolitan area because of the race, color, or national origin of the majority of the residents of those neighborhoods. The lender allegedly discriminated 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. The alleged discrimination includes the Bank's conduct of its residential and small business lending operations. (3)
During 2005, the Department concentrated significant resources on fair lending investigations involving a variety of allegations. The Department continued it focus on investigating potential redlining cases, in which a lender chooses not to do business in a neighborhood because of the race, color, or national origin of the people who live in the neighborhood, thereby denying residents of minority communities equal access to residential, consumer, and small business credit. When communities are abandoned by prime lenders through redlining, they become targets for less scrupulous lenders who may target minority neighborhoods for abusive products or loans. Lawsuits challenging redlining practices thus are an effective means to combat predatory lending. During the year 2005, in addition to the pre-suit case described above, we examined allegations that several lenders in major metropolitan areas discriminated on the basis of race and national origin by avoiding or refusing to do business in majority African American and/or Hispanic neighborhoods because of the race, color, or national origin of those neighborhoods. We also initiated an investigation involving alleged discrimination by a lender that refused to make certain loans on Indian reservations.
We also focused on working with other federal agencies to prepare for the release of new loan pricing data under the Home Mortgage Disclosure Act that may indicate fair lending violations. Under HMDA, lenders must collect and publicly report certain information about all of the home mortgage loans that they originate each year. In 2004, lenders were required to collect for the first time certain limited information about loans in which the borrower was charged an interest rate above thresholds established by the Federal Reserve Board regulations ("high cost loans"). A September 2005 study by FRB staff indicates that nationwide minority borrowers receive such high-cost loans at a significantly higher rate than whites. In November 2005, we initiated several investigations to examine whether specific lenders were discriminating against minority borrowers by charging those borrowers higher interest rates than similarly-situated white borrowers.
In addition, during 2005, we initiated an investigation into allegations that a bank vice president/loan officer engaged in a pattern or practice of discrimination by sexually harassing female credit customers.
IV. OTHER ACTIVITIES
We continue to participate in an interagency task force convened by the Federal Reserve Board, with HUD, the OCC, the OTS, the NCUA, and the Federal Trade Commission (FTC) to discuss fair lending issues and the activities of the various agencies.
During the year, Division representatives participated in a variety of conferences and meetings involving lenders, enforcement agencies, advocacy and consumer groups, and others interested in fair lending throughout the country, in order to disseminate information on our enforcement policies and activities.
1. During 2005, we continued to review two referrals received from the FDIC during 2004. One referral involved allegations that a lender discriminated against American Indian customers by requiring employees of an American Indian tribe to participate in a payroll deduction program in order to receive unsecured consumer loans and charging American Indian customers higher interest rates than white customers. After reviewing the evidence, including additional information received in the fall of 2004 from a subsequent FDIC compliance examination, and the Bank's altered lending policies and practices, we returned the referral to the agency for administrative resolution in early 2005. The second referral involved allegations that a lender discriminated on the basis of age by providing preferential treatment to persons in an age group not entitled to preferential treatment . The bank had stopped this practice upon its identification by the FDIC examiner and, after reviewing the evidence, including information indicating that it was difficult to identify with certainty the persons aggrieved by this practice, we returned the referral to the agency for administrative resolution in the fall of 2005.
2. At the end of calendar year 2005, we continued to review one referral received from HUD during 2004. That referral involves allegations that the lender discriminated against African Americans by targeting them for "predatory loans" with high fees and interest rates.
3. Discussions regarding a possible resolution of the case through pre-suit settlement negotiations began in early 2006.