Housing Section Documents

v.

DEPOSIT GUARANTY NATIONAL
BANK, a division of First
American National Bank,

___________________________________

The United States of America alleges:

1. The United States brings this action to enforce Title VIII of the Civil Rights Act of 1968 ("Fair Housing Act"), as amended by the Fair Housing Amendments Act of 1988, 42 U.S.C. §§ 3601-3619, and the Equal Credit Opportunity Act ("ECOA"), 15 U.S.C. §§ 1691-1691f.

2. This Court has jurisdiction of this action pursuant to 28 U.S.C. § 1345, 42 U.S.C. § 3614, and 15 U.S.C. § 1691(h), and venue is appropriate pursuant to 28 U.S.C. § 1391(c).

3. Defendant, Deposit Guaranty National Bank ("DGNB"), operated as a bank in Mississippi, Louisiana and Arkansas since 1925, was incorporated under the laws of Mississippi and had its principal place of business in Jackson, Mississippi until being acquired by First American Corporation ("FAC") on May 1, 1998. As a result of its acquisition, DGNB is now wholly owned by FAC, a bank holding company headquartered in Nashville, Tennessee. On September 1, 1998, First American National Bank ("FANB"), a bank subsidiary of FAC, merged with DGNB. In the geographic areas that were served by DGNB prior to its acquisition and merger, specifically including Mississippi, Louisiana and Arkansas, FANB has continued to do business under the name DGNB.

4. As National Banks, DGNB and FANB were and are subject to the regulatory supervision of the Office of the Comptroller of the Currency of the Department of the Treasury ("OCC").

5. From at least January 1, 1995 through at least April 30, 1998, DGNB's business regularly included the making of home improvement loans that were either unsecured or secured by the borrower's residence or other collateral. DGNB'S home improvement loans were residential real estate-related transactions within the meaning of the Fair Housing Act, 42 U.S.C. § 3605. DGNB was a creditor as that term is defined by section 702(e) of the ECOA, 15 U.S.C. § 1691a(e).

6. DGNB solicited and received applications for credit in the form of home improvement loans, primarily through its employees, including loan officers and managers, who worked in DGNB's branch offices. The persons submitting such credit applications are applicants as that term is defined by section 702(b) of the ECOA, 15 U.S.C. § 1691a(b).

7. DGNB was required to comply with the reporting requirements of the Home Mortgage Disclosure Act, 12 U.S.C. §§ 2801-2810 ("HMDA"), to provide information concerning applications for home mortgage and improvement loans, including the race and national origin of the applicant and whether such loans were originated or denied.

8. Information supplied by DGNB and made public through the HMDA shows that from January 1995 through December 1997, DGNB processed at least 8,110 home improvement loan applications from white and African-American individuals. Of these 8,110 applications, 5,513 were submitted by white individuals (with a white co-applicant or no co-applicant), 493 of which DGNB denied, creating a white applicant denial rate of approximately 8.9%. Among the same 8,110 home improvement applications, 2,597 applications were submitted by African-American individuals (with an African-American co-applicant or no co-applicant) 830 of which DGNB denied, creating an African-American denial rate of approximately 32.0%.

9. In January 1997, the OCC began an examination of the lending practices of DGNB to evaluate its compliance with the ECOA. Based on information gathered in its examination, the OCC determined that it had reason to believe that DGNB was engaged in a pattern or practice of discrimination on the basis of race in its lending activities, specifically, the handling of home improvement loan applications. In January, 1999, the OCC referred the matter to the Attorney General pursuant to the ECOA, 15 U.S.C. §1691(e).

10. In conducting its home improvement loan operations, DGNB processed applications using at least two methods. DGNB processed some applications, including approximately one-third (1/3) of the home improvement loan applications, using underwriting standards that did not include use of a credit scoring system to assess creditworthiness. For the remaining approximately two-thirds (2/3) of the home improvement loan applications, DGNB made underwriting decisions based in part on an assessment of credit worthiness derived from a credit scoring system, as described in the following paragraphs.

11. The credit scoring system that DGNB used in its process of underwriting certain home improvement loan applications was instituted no later than January 1, 1995, and remained in effect until at least April 30, 1998.

12. The DGNB credit scoring system assigned point values to various items of information provided on the application form completed by each prospective borrower (and co-borrower, if applicable) which DGNB deemed relevant to loan risk assessment, such as income and length of employment in current job. DGNB also obtained the applicant's credit history from one of the three major national credit-reporting agencies. DGNB next converted the applicant-specific data utilized in its customized credit scoring process into an overall credit score, a numerical value designed to increase as an applicant's apparent credit-worthiness increased.

13. The ostensible purpose of a credit scoring system is to provide a lender with an objective estimate of the likelihood that a loan will be repaid as agreed by the applicant. Credit scoring systems generally are designed with the expectation that loan applicants who attain a score that is equal to or greater than the level indicating a likelihood of repayment that is acceptable to the lender (i.e., a passing score) will be approved, while those who do not (i.e., who get a failing score) will be denied the loan.

14. With respect to credit-scored home improvement loan applications, DGNB did not strictly adhere to its stated credit scoring decision-making process or to its written underwriting guidelines for credit scoring and loan approval.

15. DGNB loan officers had broad discretion to make override decisions, known as judgmental overrides, for credit-scored loan applications -- that is, decisions to deny credit to applicants who scored at or above the stated cutoff score for loan approval ("high-side overrides") and to grant credit to applicants who scored below that cutoff score ("low-side overrides"). Further, the OCC's investigation revealed that:

(1) there was a high level of underwriting decision-making that was inconsistent with the credit scores of individual applicants; (2) each individual loan officer, rather than any centralized office, had discretionary authority to make underwriting decisions; (3) criteria for underwriting decisions were inconsistently applied and poorly documented; and (4) DGNB's monitoring of its underwriting decisions was inadequate. In sum, DGNB established a loan approval process under which DGNB employees exercised individual subjective judgments with respect to home improvement loans, and frequently overrode the decisions indicated by applicants' credit scores for purely judgmental reasons.

16. Beginning at the latest on January 1, 1995, and continuing through at least April 30, 1998, DGNB used the above-described underwriting policies and practices, which had the purpose or effect of granting credit less frequently to African-American loan applicants than it did to similarly situated white applicants. Therefore, DGNB failed or refused to implement its home improvement loan approval process without regard to race.

17. As a consequence of the defendant's discriminatory practices, African-American applicants for DGNB credit scored home improvement loans have been at least three times as likely to be rejected as similarly situated white applicants after controlling for all other facially neutral underwriting factors used by DGNB since at least January 1, 1995. The difference in the results of underwriting decisions between the loan applications made by African-Americans and those made by similarly situated whites could not have occurred by chance and cannot be explained by differences in the borrowers' loan qualifications or other legitimate business factors unrelated to race.

18. DGNB's policies and practices, as described above, constitute:

This unlawfully discriminatory pattern or practice and denial of rights occurred during the time period beginning no later than January 1, 1995, and continuing through at least April 30, 1998.

19. Specifically, the pattern or practice, as alleged herein, constitutes: