Remarks by Acting Assistant Attorney General Vanita Gupta at the CRA & Fair Lending Colloquium

Remarks as Prepared for Delivery

Good morning.  Thank you, Ed, for that kind introduction and for inviting me to address the Colloquium.

It has been three years since former Assistant Attorney General Tom Perez spoke to this audience, and much has happened since then.  So I am grateful for the opportunity to share with you the work we are doing at the Civil Rights Division, for which I take full credit, of course, after my lengthy tenure of two weeks on the job.  In all seriousness, I am honored to speak on behalf of the Division and am excited to explain our mission and our ongoing efforts to combat unlawful lending discrimination wherever it occurs.  My colleagues, Steve Rosenbaum, Coty Montag and Jon Seward and I greatly look forward to hearing from our sister agencies, community partners, and those in the industry.  This Colloquium is a wonderful tradition and an important event for furthering fair lending.

Some things have not changed much since Tom Perez addressed this audience in 2011.  Collaboration, outreach, education, and partnerships remain fundamental cornerstones to our success at the division.  We’ve found over and over again that these efforts lead to effective enforcement of fair-lending laws and lasting prevention of fair-lending violations.  Overall, the most potent force for fair lending comes from within banks and other lending institutions.  So I’m glad to see such a large attendance here today.  It shows a shared commitment to a fair economic playing field for all borrowers. 

In my remarks, I’d first like to talk about the mission of the Civil Rights Division.  Second, I want to give an update on what the division has accomplished in fair lending enforcement since Tom Perez last addressed this audience.  And finally, I want to take a step back and share what we have learned. 

But before I go any further, I take great pride in announcing today two major achievements:  

• First, in June of this year the Civil Rights Division reached1 billion dollars in monetary relief for individual borrowers and impacted communities;

• And second, we expect our National Mortgage Settlement for illegal foreclosures and illegal interest rates under the Servicemembers Civil Relief Act will provide approximately $200 million in relief for servicemembers.

I’ll touch on each accomplishment in more detail in a few minutes, but I must say I am thrilled to begin my work with the division and to build off what have already been remarkable achievements. 

Our job at the Civil Rights Division is to uphold some of the most basic tenets of what it means to be an American – that is, equal opportunity and equal justice.  Since our country’s founding, Americans have held onto these principles as promises.  And through persistent and evenhanded enforcement of our civil rights laws, the division follows through on those promises.  For over 50 years, the Civil Rights Division has rooted out discrimination and upheld basic civil and constitutional rights for those who live in America, particularly the most vulnerable in our society.  We have made great strides forward.

Fundamental to the promise of equal opportunity is the right to access credit on an equal basis.  Fair lending opportunities open up equal access to education, equal access to entrepreneurship, equal access to earning, mobility, and homeownership.  And because of that, this administration has made fair lending enforcement a top priority.  We have shown that we will use all tools in our arsenal to ensure that every eligible person has access to credit opportunities, free from discrimination.

On that point, I want to make sure one thing is clear:  this administration sees fair lending as an essential component in ensuring a sound, stable banking industry.  Fair lending does not come at the cost of safe lending practices.  Quite the opposite.  As we emerge from the financial crisis we can begin to see clearly where the cracks in the foundation formed and how they expanded.  Certainly there was a lack of consumer protection.  Certainly more meaningful federal oversight and enforcement would have strengthened, not weakened, the stability of the industry.  In fact, it was specifically the abuse of fair-lending principles that shook our entire economy.  It is my firm belief that strong enforcement of our fair-lending laws is integral to the economic opportunity of all Americans, not just those who are directly denied access to fair credit.

And I know many of you in this room -- and throughout the lending industry -- agree.  This is made clear by your participation here today.  We recognize that many banks have been proactive in establishing sound lending practices and proper internal controls.  They have recognized that fair lending and promoting the economic health of the entire community are good business.  We commend those efforts.

But despite our progress, despite those efforts, civil rights challenges endure.  Factors like race and national origin have proven too often to be intractable influences on lending.  It is clear that while many lenders are making every effort to develop comprehensive compliance programs, others are fencing out or exploiting underserved communities.

The housing crisis provides stark evidence of those tactics.  Starting in 2007, we saw devastation to communities nationwide, but African-American and Hispanic communities bore the brunt of it:

• We’ve seen over and over again in our enforcement actions that African-American and Hispanic borrowers paid higher rates for loans even when controlling for valid credit factors, like income.

• Over and over again, African-Americans and Hispanics were saddled with subprime mortgage loans, with risky, expensive, and confusing terms – not because they weren’t qualified for prime loans, but because of their race and national origin.

• And over and over again, prime lenders avoided minority neighborhoods, writing off blocks of people because of the demographics of the neighborhoods, thereby denying minority borrowers the ability to gain access to credit or to refinance existing loans.

I am proud to say, though, that the response from the division has been strong and it has been unrelenting.  Although I recognize these problems endure for too many people, over the last four years there has been an unprecedented period of fair lending enforcement.

In 2011, when the division last gave a keynote to this Colloquium, the division had established its Fair Lending Unit within the Housing and Civil Enforcement Section only a year earlier.  Today, the unit remains dedicated to ensuring a level playing field for borrowers through its enforcement of three fair lending laws: the Equal Credit Opportunity Act; the Fair Housing Act; and the Servicemembers Civil Relief Act.  The unit focuses on all aspects of potentially discriminatory actions by creditors, and all forms of lending, including mortgage lending, auto lending, business lending, credit-card products, and unsecured consumer lending, among others. 

In these areas, the division has achieved remarkable success.  In 2011, Tom Perez stood before this Colloquium and announced a settlement with AIG for $6.1 million for discriminatory pricing practices – at that time, the largest monetary award for a fair lending case.  Since then, though, the stakes have gotten higher.  Just this year, we settled a suit against Sallie Mae for $60 million, a suit against Ally Financial Inc. and Ally Bank for $98 million, and a suit against GE Capital Retail Bank, now known as Synchrony Bank, for $169 million.  In late 2011 and 2012, we settled a suit against Countrywide Financial for $335 million, and a suit against Wells Fargo for $234 million.  These accomplishments have amounted to over $1 billion in monetary relief for individual borrowers and impacted communities since 2010.

And our success was not just in a few large cases.  During this period, the division filed or resolved 35 matters under ECOA, the FHA, and the SCRA, an average of over eight cases a year.  Compare that with the Department’s efforts from 1993 to 2008, a 15-year period when the Department resolved 37 lending matters total, averaging around 2 lending cases a year.

That said, it’s not all about the numbers, and I know litigation is not the big fix.  These cases have not addressed all the abuses in the marketplace, and certainly not all the harm to victims of fair lending violations.

But over the last four years, our enforcement actions have uncovered and remedied a wide range of illegal conduct. The details of these enforcement actions highlight at least four realities:

• One: significant and varied discrimination still exists in lending practices.

• Two: unmonitored and unmoored discretion for loan originators too often leads to fair-lending violations.

• Three: the division will hold financial institutions accountable for those violations and it will seek broad, comprehensive compensation for victims and communities.

• And four: there are numerous examples that lending officials can use to inform their internal fair-lending policies, and, in turn, avoid an enforcement action by the department.

I’ll touch on a few of them here.

The settlements in Countrywide and Wells Fargo are the largest fair lending settlements in the department’s history, so I want to share with you some important background about those cases.  The story at the core of the Countrywide and Wells Fargo complaints was not complicated.  If you were African-American or Hispanic, you were more likely to be placed in a subprime loan or pay more for your mortgage loan than if you were a white borrower with similar creditworthiness.  That roughly sums up the actionable facts.

How that happened was only a little more complicated.  Our investigations revealed that both Countrywide and Wells Fargo allowed their mortgage brokers and loan officers to place a loan applicant in a subprime loan even when the applicant qualified for a prime loan according to the banks’ underwriting procedures.  This conduct goes to the heart of some of the most harmful practices that led to the housing and foreclosure crisis.

And the resulting disparities were significant.  As an example, we determined that the odds of an African-American or Hispanic borrower receiving a subprime loan instead of a prime loan from Countrywide were more than twice as high as those for similarly-qualified white borrowers. 

If that wasn’t enough, we also determined that Countrywide and Wells Fargo charged higher prices on prime and subprime loans to African-American and Hispanic borrowers as compared to white borrowers.  Again, the banks allowed their loan officers and mortgage brokers to vary a loan’s interest rate and other fees from the price they set based on a borrower’s objective credit-related characteristics.  And the banks gave that discretion without providing clear guidance or sufficient monitoring for fair lending compliance.  As a result, African-American and Hispanic prime and subprime borrowers were charged significantly more for mortgage loans.

The impact to victims goes beyond simple differences in prices, though.  The resulting harm to individual credit can affect a person’s ability to find housing, employment, or access higher education.  The victim compensation funds established through the Countrywide and Wells Fargo settlements specifically attempted to lessen these effects.  In Countrywide, the bank agreed to pay $335 million for approximately 200,000 victims of discrimination.  Wells Fargo paid over $184 million to thousands of victims of steering and pricing discrimination.  The process of victim identification, location, and compensation in our lending resolutions is ongoing.  Still, individual borrowers already have received checks for over 90 percent of the $550 million in fair lending settlements between 2011 and 2013.

And the effects of lending discrimination go beyond the individual victims.  Widespread patterns of discrimination cause collateral damage to entire communities, depriving those areas of economic opportunities: 

• renters find themselves evicted,

• homes are abandoned and often vandalized,

• entire neighborhoods experience depressed property values and declining tax revenues; and

• former homeowners find themselves unable to recover from a foreclosure and get back on their feet.

Banks violating fair lending laws should expect to account for some of these consequential damages.

The Wells Fargo settlement sought to address the harm to communities through the CityLift program.  Under CityLift, Wells Fargo provided $50 million in borrower assistance in areas most impacted by the housing crisis.  The program was implemented in nine cities – all to resounding success.  To date, over 2,600 loans have closed with grants through the CityLift program. 

Not surprisingly, investigating potential mortgage pricing discrimination has been a large part of the division’s fair lending docket.  In addition to the settlements with Countrywide and Wells Fargo, since 2011, we have settled six other suits alleging mortgage pricing discrimination. 

In our case against SunTrust Mortgage, we alleged that the bank discriminated against at least 20,000 African-American and Hispanic borrowers across the country by systematically charging them higher discretionary broker fees and retail loan markups as compared to white borrowers.  The settlement provided for a $21 million fund for victims and requires the bank to maintain improved pricing policies and be subject to fair lending monitoring.  In our suit against National City Bank, it was largely the same conduct.  There, the suit resulted from a joint investigation with the Consumer Financial Protection Bureau, and the consent order requires a $35 million fund for victims.

I could keep going down the list, but the point is this:  as long as this type of conduct is repeated, the division will aggressively bring enforcement suits, and we will seek broad, comprehensive relief.

Beyond mortgage pricing, we have addressed lending discrimination in a variety of other settings.  We recently brought two cases—one against Texas Champion Bank, and another against Fort Davis State Bank— for discrimination against Hispanic borrowers in the pricing of unsecured consumer loans. 

We do recognize that responsible lenders making smaller unsecured loans available on a non-discriminatory basis often serve as a viable alternative to high-cost pay-day loans.  What these cases and others like it demonstrate, though, is that the division is committed to fair lending enforcement across the entire spectrum of credit markets and discriminatory tactics. 

Redlining—as another example—continues to be a problem.  As the subprime boom fades, redlining for prime loans is coming back into stark focus.  Qualified homebuyers are too often denied the opportunity to access credit, not because of their income or their credit history, but because of the race or national origin of the members of their neighborhood.  In turn, they are denied an opportunity to invest in their community, to build wealth, to establish a home.  

In our most recent redlining action, a case against Community State Bank in Michigan, the pattern of discrimination was clear.  We alleged that:

• The bank had virtually all of its branches located in majority-white census tracts;

• it lacked marketing and outreach to majority African-American areas;

• it trailed its peer lenders in serving minority neighborhoods by statistically significant amounts; and

• its CRA assessment areas were drawn to avoid African-American communities.

Both statistically and spatially the discrimination stood out.  Tom Perez advised this Colloquium in 2011 that banks should avoid having a CRA assessment area that looks like a bagel, or a puzzle missing a piece.  That remains good advice. 

In recent years, the division, in collaboration with the CFPB, has turned its focus to discretionary pricing systems utilized by indirect auto and motorcycle lenders.  In 2013 alone, the division and the bureau initiated nine joint automobile lending investigations. 

Since we began this auto lending initiative, we have already seen considerable success.  Last December, the division, along with the CFPB, reached its largest-ever auto lending settlement with Ally Financial and Ally Bank, which are among the nation’s largest car lenders.  The suit was a result of a referral from the CFPB, and was the first joint fair lending enforcement effort by the division and the bureau.  The settlement underscores the strong enforcement partnership between the division and the CFPB. 

The story of discrimination in Ally is similar to those I’ve already recounted in other lending contexts.  The complaint alleged that Ally discriminated by charging higher interest rates on auto loans to approximately 235,000 African-American, Hispanic, and Asian/Pacific Islander borrowers as compared to white borrowers — and not because of differences in creditworthiness. 

The cause of these disparities may sound familiar to you at this point in my comments.  Again, the lender granted individual lending officers discretion to charge higher prices — in this case, auto dealers had discretion on interest rate markups.  Again, that discretion was not coupled with sufficient fair lending guidelines and monitoring.  And again, that discretion was used to systematically charge minority borrowers higher rates than white borrowers. 

The scope and focus of the settlement should seem familiar to you by now, too.  The Ally settlement provides for $80 million in compensation for victims of alleged past discrimination and requires Ally to pay $18 million to the CFPB’s Civil Penalty Fund.  In addition to the $98 million in payments, for three years, Ally must refund any discriminatory overcharges unless it substantially reduces disparities in unjustified interest rate markups.  It must also make significant improvements to its compliance management systems.  By now, I hope everyone recognizes the significant risk lenders take when they remove themselves from the determination of loan terms and then turn a blind eye to the result.  

In the auto lending context, the division has also taken aim at reverse redlining in our Auto Fare case.  In January, we filed suit against the owners and operators of two “buy here, pay here” used car dealerships, alleging that they targeted African-American customers for unfair and predatory credit practices in the financing of used car purchases.  As this case shows, the division has and will pursue fair-lending violations outside of the traditional contexts of banks and mortgage loans, and will continue to investigate predatory lending even as subprime mortgage loans fade from mortgage-lender portfolios. 

At the same time, though, we encourage lenders to be proactive.  In the CFPB’s 2014 Supervisory Highlights publication, the bureau emphasizes several tools in the auto-lending context I think are worth mentioning here; they would go a long way toward reducing the risk of an enforcement action.  They include some tools I have already mentioned, like strong internal compliance measures, but also things like non-discretionary dealer compensation policies and capping discretionary pricing adjustments at, say, 100 basis points, rather than the more common 200 or 250 basis points.

Some lenders have already taken notice.  I join CFPB Director Richard Cordray in commending BMO Harris Bank for being the first indirect auto-lender to adopt a flat-fee structure, limiting the unchecked discretion of individual dealers and, in turn, reducing room for discrimination.  This type of proactive effort on the part of lenders deserves to be recognized.    

If I might, I’d like to turn now to yet another lending product—credit cards.  Our recent case against Synchrony Bank highlights some important lessons.  That case was another referral from the CFPB, and was both jointly investigated and enforced with that agency.  The division’s complaint alleged that between 2009 and 2012, Hispanic borrowers were left out of two debt-repayment programs that forgave part or all of a borrower’s debt.  Specifically, the bank excluded borrowers who indicated that they preferred communications in Spanish and borrowers with addresses in Puerto Rico. 

This is an example of a case where not much explanation is needed to show how the bank violated fair lending laws.  Some advice:  specifically excluding those who speak Spanish or those who live in Puerto Rico from receiving benefits that others receive is going to raise red flags for us.

Because of these exclusions, around 108,000 borrowers were denied benefits that could have significantly reduced their debt burden.  The complaint alleges that as a result, Hispanic borrowers experienced higher debt levels and longer periods of debt; some of these Hispanic borrowers may have suffered additional consequential economic damages, including increased risk of credit problems, default, and repossession; having their accounts closed or “charged-off” and sold to a third party; and other damages, including emotional distress. 

Lending discrimination is always unacceptable, but the scope of the potential harm here, as well as the obvious, facial nature of the discrimination, was particularly troubling. 

We commend Synchrony Bank, though, for its efforts after it identified the discriminatory conduct:

• for reporting the issue to the CFPB;

• for taking proactive steps to provide relief to affected borrowers, even before government intervention; and

• for working closely with the department and CFPB in coming to a resolution.

It was an effective working relationship.  This past June, the bank agreed to provide $169 million in relief for borrowers in the form of waivers and credits to existing balances, and checks to borrowers who had already paid off their entire debt.  In addition, the bank will provide credit history repairs for affected borrowers, will undergo training, and will implement significant fair lending compliance and monitoring measures.

We hope this case will motivate lenders—not just credit card issuers—to look carefully at how they structure and publicize borrower benefits, and to include those decisions in their internal fair lending compliance monitoring.

Similarly, the division has taken notice of other overtly discriminatory policies, like income verification procedures that apply only to borrowers with disabilities, as was the case in our 2012 suit against Bank of America and our more recent case against Fifth Third Mortgage Company.  In our complaint against Fifth Third, for example, we alleged that the company violated the FHA and ECOA by requiring recipients of disability benefits to provide a letter from a doctor to substantiate their income.  Similar levels of verification were not required for people without disabilities.  In August of this year, we reached a settlement with Fifth Third, providing for new policies, employee training, and a $1.5 million fund to compensate victims. 

These cases underscore the importance of careful oversight of restrictive policies, especially those that are based on protected characteristics of borrowers.

In general, though, lenders should be aware that restrictive policies that are unrelated to a borrower’s creditworthiness and do not serve legitimate business purposes can violate the law.  That is why the department brought and settled a case against Luther Burbank Savings challenging the bank’s $400,000 minimum loan amount policy.  We found that the bank had originated very few loans to minority borrowers and in minority census tracts compared to other prime lenders in California, and alleged that this low level of lending was attributable to the minimum loan amount policy. 

Our case against Luther also underscores the importance we place on community remediation.  Under the settlement, Luther will invest $1.1 million in a special financing program.  The program will increase the mortgage credit that the bank extends to qualified borrowers seeking loans of $400,000 or less in predominantly minority areas of California.  Luther will also invest $450,000 in partnerships with community-based organizations that provide credit and financial services to minorities in the affected areas.  The bank worked collaboratively with the division to finalize a plan that will increase loans to minority and low-income borrowers and provide much-needed assistance to communities throughout California. 

Finally, the division has done significant civil rights work on behalf of our servicemembers, both in terms of foreclosures and loan-rate protections.  The Servicemembers Civil Relief Act provides for protections during the foreclosure process so that members of the armed forces can focus as much of their attention as possible on their military responsibilities without facing adverse consequences for themselves or their families.  It also guarantees servicemembers reduced interest rates of six percent or lower on loans incurred before entering into military service. 

The division has entered into several settlements over the last four years with mortgage servicers.  And as a result, the vast majority of all foreclosures against servicemembers since 2006 will now be subject to court-ordered review.  For example, in April 2012, the division obtained settlements under the SCRA with the nation’s five largest mortgage servicers: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial.  As part of the agreements, all five servicers are conducting reviews to determine whether any servicemembers have been foreclosed on in violation of the SCRA since 2006, and whether servicemembers have been unlawfully charged interest in excess of six percent on their mortgages since 2008.  Most servicemembers foreclosed on in violation of the SCRA will receive a minimum of $125,000, plus compensation for lost equity. 

As I noted at the outset of my comments, we expect the foreclosure and interest rate reviews to result in the payment of approximately $200 million to servicemembers.  This remains the largest SCRA settlement in history.

Moreover, in addition to mortgages, the division has focused on a wide range of servicemembers’ loans, including student loans.  In May of this year, the division filed a suit against Sallie Mae alleging that it failed to reduce to six percent the interest rates on pre-service loans held by approximately 60,000 servicemembers, and improperly obtained default judgments against servicemembers.  Sallie Mae agreed to a settlement providing for $60 million to compensate victims and a $55,000 civil penalty.  The settlement also requires Sallie Mae to correct negative credit-entries and streamline the process for servicemembers looking to obtain SCRA interest-rate benefits.  This latter provision will go a long way toward ensuring against future violations, and we are happy to hear that other lenders are adopting similar streamlined processes.

Stepping back, you can see some commonalities in these cases.  Again, many of the cases involved discretion for loan originators coupled with indefinite guidelines for how to set rates and fees.  Many of the cases involved inadequate information and documentation for borrowers explaining their options and the differences in those options.  Many involved policies that served no legitimate business necessity and were not well thought out, or were even facially discriminatory.  And all involved a need for better internal fair-lending compliance measures and monitoring. 

What you will not see is the division forcing lenders to make bad loans.  These are not cases where the safety and soundness of a lending institution is compromised by fair-lending compliance, nor were these cases where lending institutions were able to show legitimate justifications for their actions.  These are cases where borrowers did not have access to equal credit, for reasons that are not related to their creditworthiness.  It is as simple as that.   

In order to ensure that we continue to focus our resources on effectively combatting the most serious and harmful forms of discrimination, the division has stepped back and reviewed our work to assess how we can be most successful in fair-lending enforcement and prevention. And here’s what we found.

As I mentioned at the outset, when it comes to enforcement, the core of the division’s success is its collaboration with federal and state partners.  Every single ECOA, FHA, and SCRA case has involved collaboration with other government agencies and other offices within the department, including the U.S. Attorneys’ offices.  For example:

• Our investigation into Countrywide’s lending practices began after referrals by the Board of Governors of the Federal Reserve and the Office of Thrift Supervision.

• The OCC referred the Wells Fargo matter to the division, and was a critical partner in developing our investigation.

• The FDIC has referred a record number of matters to the department in recent years, including a number of referrals involving complex and novel issues, like private student lending and unsecured consumer loan pricing.

• Our ongoing relationship with HUD led to the successful resolution of the matter against Bank of America in 2012 and against Fifth Third this past August involving discrimination against recipients of disability income.

• And the CFPB referred us the Synchrony Bank, Ally, and National City matters, where, in all three, we jointly conducted the investigation and enforcement actions.

We have also had great success in partnering with state attorneys general.  The Countrywide and Wells Fargo cases were done in coordination with the Illinois Attorney General’s office, and our recent Auto Fare case was investigated and filed jointly with the North Carolina Department of Justice. 

We rely on these relationships to stay informed, flexible, and creative enough to enforce the law against an ever-changing world of fair lending discrimination.  And the regular conversations that we have with our sister agencies facilitate a more consistent application of fair-lending analyses, thereby making it easier for lenders to conduct compliance reviews. 

In terms of prevention, as I have already mentioned, the key comes from the internal efforts of lending institutions.  Internal policing and monitoring and clear guidelines for creditworthiness are the most effective tools to prevent fair lending violations.  And as part of those efforts, commitment to the principles of fair lending must be clearly and consistently communicated from the top, by senior executives and boards of directors.  That is a large reason why I am here today.  Both the Attorney General and I are fully committed to the division’s fair-lending efforts and we have made outreach and education a priority.  Civil Rights Division attorneys attend numerous conferences and frequently meet with industry stakeholders to discuss our enforcement actions and our priorities.  This colloquium is a prime example.  As has been the case for several years, my colleagues will be presenting at multiple panels over the next few days.

But outreach is a two-way street: we encourage lenders to reach out to us, and we appreciate those who already have.  In fact, we have learned a great deal from lenders and have undertaken efforts to address what we recognize as legitimate concerns.  For example, we have worked toward transparency, again through outreach and education like this, but also by posting on our website summaries, complaints, press releases, and settlement details for all of our cases. 

What is more, we have made great strides to reduce any delay that might lead to uncertainty for those facing a potential investigation.  In 2011, we set a goal of 90 days from a referral to determine whether a matter should be investigated by the department.  In 2012, we went further, setting a goal of 60 days for 2013.  Today, I am happy to say we have met that goal with 100 percent of our referrals, averaging just 35 days last year to make our initial determination.  Moving forward, we will continue to learn from lenders and make any changes that will avoid unnecessary hardship and help further fair lending.

Although we have made significant progress in the last few years, we still have work to do.  We will continue to use all the tools in our arsenal to root out discrimination. Our fair lending actions have focused on the policies and practices that contributed to the housing and foreclosure crisis. But we have already started on our next challenge: to confront any new possible causes or sources of discrimination, and to prevent any new lending violations wherever possible.  This will require both government and industry to work together and I look forward to those joint efforts.

Thank you again for inviting me to speak here today.