Good Morning and thank you for inviting me to address the Colloquium again.
When I spoke to you last year I let you know that the Department of Justice had made fair lending a top priority. I laid out the vision and priorities of our fair lending enforcement program, discussed the newly created fair lending unit in our Housing and Civil Enforcement Section and the fact that the Department had dedicated more resources to fair lending than ever before. I also discussed the unprecedented level of collaboration and coordination between DOJ and its partner agencies.
Enforcement, partnership, education, outreach and prevention continue to be the cornerstones of our fair lending program. These activities are designed to ensure equal opportunity to access the American dream. In our time together today, I want to discuss our efforts in these areas. Among other things, I want to provide an update on our fair lending enforcement activities over the past year. I also want to share what I have learned from the various meetings and interactions we have had with industry stakeholders. It is critical to continue our dialogue about how we can ensure a level playing field for all who are seeking economic opportunity and a fair chance at the American Dream.
I have great respect for the work that you do. As I have mentioned to many of you, my wife’s grandfather was the head of a community bank in a small town in Wisconsin. When he retired, my wife’s aunt became President. She recently retired, but remains Chair of the Board. Between the two of them, they have played leadership roles in the bank for roughly 40 years. This bank is a pillar of the community, and has provided access to opportunity for so many. I believe that every community should have access to the types of services and opportunities that banks such as my aunt’s bank-- indeed, small and large institutions alike, offer.
Our job as an administration is to ensure the safety and soundness of the banking industry. Our job as an administration is also to ensure that every eligible person has access to equal credit opportunity free from discrimination. There are some who believe that there is a tension between safety and soundness on the one hand, and effective fair lending enforcement. Some contend that the two are incompatible.
I appreciate this point of view, but I must admit that I could not disagree more strongly with it. To the contrary, it was a lack of common sense consumer protection, and a lack of meaningful federal oversight and enforcement in the prior administration that contributed to our current crisis. This crisis has not only hurt families and communities across the country, but also decimated entire industries and undermined the safety and soundness of so many lending institutions.
When I began my tenure in October 2009, I observed that the Division’s fair lending enforcement program had waned in the prior administration. The political leadership in the prior administration sent an unmistakable message that it would be next to impossible to bring a fair lending lawsuit using disparate impact theory. As a result, the hands of the dedicated career staff were tied in so many instances. This Administration has been clear; we will pursue discrimination cases based on both intentional discrimination and disparate impact. Both theories are legitimate and critical tools of robust civil rights enforcement. Without a credible enforcement program, we can never achieve full compliance with the law or fully level the playing field between responsible lending institutions and unscrupulous lenders.
That is why we created the dedicated Fair Lending Unit in our Housing and Civil Enforcement Section shortly after my arrival so that we could implement our program of enforcement, partnership, education, outreach and prevention.
Along with our partners at the bank regulatory agencies and HUD we’ve begun to deliver on our promise to build a robust fair lending program. Since the Unit was established in 2010, we’ve reached settlements or filed complaints in 10 pattern or practice lending cases. 9 of those 10 matters were filed or settled since I spoke to you last year. And in 2011, we filed a record number of cases under the Equal Credit Opportunity Act.
In our cases that have settled, we have secured over $30 million in direct compensation for individuals whose rights were violated. And in our redlining cases, which I will discuss in detail this morning, we secured millions of dollars more in relief for communities harmed by discriminatory conduct. In addition, we currently have 7 authorized suits and more than 20 active investigations, including the previously disclosed investigation against Bank of America/Countrywide. These matters involve redlining claims, pricing discrimination, product steering based on race or national origin, and violations of the SCRA.
Much of our enforcement is done in close coordination with the President’s Financial Fraud Enforcement Task Force. The Task Force was designed to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The Task Force includes representatives from the highest levels at the U.S. Department of Justice, federal law enforcement agencies, regulatory authorities, and inspectors general, state attorneys general, and local law enforcement who, working together, constitute a powerful army of criminal and civil enforcement personnel.
The task force’s activities include the lawsuit filed earlier this month against Allied Home Mortgage for nearly a decade of misconduct in originating FHA-insured loans which resulted in hundreds of millions of dollars in losses to the taxpayers and thousands of families facing foreclosure.
Cooperation with our partners at our sister agencies at both the federal and state levels is essential to the effective and efficient enforcement of fair lending laws.
The level of the collaboration has been unprecedented. As evidence, in 2010, the Division received 49 referrals from partner agencies, more than it had received in at least 20 years. Twenty-six of these referrals involved discrimination based on race or national origin. In contrast, from 2001 through 2008 the Division received only a combined total of 30 referrals involving discrimination based on race or national origin.
And we’ve worked hard to make sure we are evaluating those referrals as quickly as possible. In response to feedback from industry groups, lenders, and our regulatory partners, we committed to a goal of making an initial determination about whether to open an investigation or return the matter to the regulator within 90 days of receiving a referral. And this year we have met that goal for virtually every referral received by the Department.
Some critics contend that the Department is unfairly targeting small banks. This is not supported by the facts. When the facts indicate that the law has been violated we will not hesitate to pursue an enforcement action. However, we do not take the decision to file suit against any defendant lightly.
During this administration, the Department has received from the federal bank regulators approximately 80 referrals of banks with less than $10 billion in assets. We have reviewed each of those referrals carefully, and approximately 75% of the time we have returned the referral to the regulator without taking enforcement action. In the remaining roughly 25% of the matters, the Department requested more information from the lender and often, as a result, determined that referring the matter back to the regulator for administrative enforcement was the appropriate course of action.
And our enforcement actions have been by no means been limited to community banks. Six of the 10 matters that Unit has filed or settled have been against institutions with national footprints, including AIG, SCRA cases against Bank of America, and a pending lawsuit against Mortgage Guaranty Insurance Corporation, the nation’s largest mortgage insurance company. In addition, as has been previously disclosed, the Department has an active fair lending investigation against Bank of America/Countrywide, as well as other large lenders.
The cases brought by the unit cover a variety of types of discrimination, including redlining, pricing discrimination and wrongful foreclosure, and aim to remedy discrimination against a number of different communities.
Last year I told you that two areas of focus would be redlining and pricing cases. And these areas accounted for almost all of the Unit’s cases brought under ECOA and the Fair Housing Act.
Since the landmark redlining case against Chevy Chase Bank in 1994, redlining cases have been a staple of the Department’s fair lending enforcement. This was true in the last administration as well. The critical importance of our redlining cases has only grown in recent years as a result of the foreclosure crisis which has hit communities of color particularly hard.
Redlining is a regrettably long-standing practice that is discriminatory and illegal. Its destructive impact is exacerbated by the fact that many of the communities that were “redlined” had seen considerable investment in the years leading up to the boom and that investment has been lost in the crisis – collateral community damage wrought by discrimination. Access to credit is a fundamental building block for healthy communities. When qualified homebuyers are denied the opportunity to access credit on the same basis as other qualified homebuyers simply because of their race or national origin, or because of the dominant race or national origin in their neighborhood, they are denied the opportunity to build wealth and create stable communities.
In the last year we brought, and settled, two redlining cases: one against Citizens Bank of Flint, Michigan and the other against Midwest BankCentre of St. Louis County, Missouri. The cases have certain common facts.
In both cases the pattern of redlining was easily recognized because the St. Louis metro area and the Detroit metro area have long histories of highly-segregated residential housing patterns, especially for African-Americans. According to Census data, in 2000 Detroit was the most segregated metro area and St. Louis the 9th most segregated community in the U.S.
Both cases were referrals from the Federal Reserve. Both banks had all or virtually all of their branches located in majority white census tracts. And in both cases there was a lack of marketing and outreach to majority African-American census tracts.
Both banks trailed their peer lenders by a statistically significant amount in serving majority black census tracks. For example, in Midwest we alleged that from 2004 to 2008, the bank’s peer lenders’ percentage of applications from, and originations in, majority African-American census tracts was about 4 times the percentage received by the bank.
In short, in both Citzens and Midwest, the evidence showed that the banks were judging communities, specifically, individuals living in those communities, by the color of their skin rather than the content of their creditworthiness.
In both cases we alleged that the banks’ CRA assessment area was drawn to avoid African-American communities. The Citizens Bank assessment area formed a virtual horseshoe around Detroit and the Midwest assessment area formed a virtual horseshoe around African-American neighborhoods in the City of St. Louis. A bank compliance officer gave good advice on CRA assessment areas: if your assessment area looks like something you can eat - a bagel or is crescent shaped - that should be a red flag for your bank. I would make a friendly amendment based on the Citizens’ map, which is available on our website, if your CRA assessment area looks like a puzzle that is missing a piece, or a horseshoe, that should also send up a red flag.
Some have criticized the Department’s redlining cases for holding banks responsible for a lack of services provided outside of their self-determined assessment areas. However, our approach is similar to actions taken in both the Bush and Clinton Administrations, including the landmark Chevy Chase case. Cases filed in the last administration included allegations of both a history of CRA assessment areas that excluded majority minority areas and statistical analyses assessing the lender’s services to majority minority tracts in an area beyond the banks’ CRA assessment area.
The allegations in Midwest and Citizens are regrettably very similar to what we saw in our cases brought from 1994 to 2008.
The settlements in the Midwest and Citizens build on our previous settlements, but also seek to address the unique challenges facing communities seeking to recover from the foreclosure crisis.
For years, in its redlining cases, the Department included provisions which require lenders to establish a physical presence in the community, conduct marketing campaigns targeting the previously redlined communities, and create special financing programs that provide loans at discounted costs to qualified residents of the redlined communities. These remedies ensure that the bank establishes a robust presence in communities they had previously failed to serve.
They are critical components of fair lending enforcement, and they remain the core of the Department’s settlements, including our settlements with Citizens and Midwest. Citizens agreed to open a loan production office in an African-American neighborhood in Detroit, to engage in affirmative marketing, and to invest approximately $3.6 million in Wayne County and the City of Detroit. Midwest agreed to similar provisions including investing approximately $1.45 million in African-American neighborhoods in St. Louis.
However, these provisions alone will not always make communities whole. For this reason, the Civil Rights Division has worked to include in recent settlements several innovative provisions to address the full scope of damage experienced by communities.
For example, in the Citizen’s settlement there is a provision to help stabilize neighborhoods by providing home improvement grants to current homeowners living in neighborhoods hard hit by foreclosures. This measure is an acknowledgement that the failure of a bank to fully provide its services to a community impacts not only those denied credit to purchase homes in the community, but its current residents as well.
In Midwest, the decree includes several provisions to help residents repair their credit and provide access to low-cost checking accounts. This will not only help remedy the harm resulting from the bank's failure to serve the community, but is also good for the bank’s business by helping to build relationships with new customers in an untapped market.
Both Citizens and Midwest worked collaboratively with the Department to develop these creative solutions, and were eager to find solutions that allow them to remedy the harm done while also reaching new customers.
In short, what characterizes our redlining work is the continuity of these efforts over many years, and the regrettable persistence of the practice. As such, I must confess that I was rather amused to see the re-emergence of the inaccurate but persistent critique that our fair lending enforcement in general, and the Department’s redlining settlements in particular, led banks to make loans to borrowers who lacked the ability to repay.
Many of those putting forth this claim also contended that the Community Reinvestment Act was a major cause of the foreclosure crisis. As you know, CRA loans performed substantially better than subprime loans, and the CRA has been around for decades.
As was the case with the CRA argument, the contention that fair lending enforcement, particularly our redlining cases, requires lenders to make loans to people who cannot repay is not supported by the facts.
We have no interest in loans being made to borrowers who lack the ability to repay. I have seen first hand the devastation that those loans, and the inevitable foreclosure that follows, has had on communities of color. The Department’s settlement agreements repeatedly make clear that no provision in the agreements require banks to make an unsafe or unsound loan.
For example, the Midwest consent order states: “No provision of this Order, including this special financing program commitment, requires Midwest to make any unsafe or unsound loan.”
We also coordinate with banks’ regulators to ensure our settlements are consistent with the requirement that banks’ operate in a safe and sound manner.
Let me turn to our pricing cases, because we have learned a number of important lessons from this area of enforcement. The Department has brought several pricing cases where African-American and Latino borrowers were charged more than similarly qualified white borrowers. These cases included multi-million dollar settlements with AIG Federal Savings Bank and PrimeLending, as well as the first unsecured consumer lending pricing case brought by the Department in at least a decade. These cases were brought as the result of referrals from the FDIC, the Federal Reserve, and the Office of Thrift Supervision.
Many of our pricing cases relied, in part, on disparate impact theory to show a violation of the law. The Civil Rights Division will make use of all the tools in our arsenal to root out discrimination, including disparate impact theory if the facts support its application.
Some critics contend that when we use disparate impact theory the Department ignores legitimate factors, such as credit score, that explain disparities in interest rates and fees. This shows both a misunderstanding of disparate impact theory and how the Department develops its cases. Under disparate impact theory, not all policies or practices that have a disparate impact are illegal. If a lender can show that the policy or practice serves a legitimate business need they may not be liable. And in our cases, we will look at legitimate creditworthiness factors to see if they explain differences in the prices paid by African-Americans or Latinos and white borrowers. Regrettably, we have found that all too often borrowers are judged by the color of their skin rather than the content of their creditworthiness.
There are certain common elements that underlie many of our pricing cases: discretion to a loan originator coupled with a lack of guidelines for how to set fees or interest rates, lack of documentation explaining differences in prices, and a lack of fair lending compliance policies and monitoring.
In addition to our traditional fair lending work, we’ve stepped up efforts to protect the rights of our service-men and –women through enforcement of the Servicemembers Civil Relief Act. This Spring, the Division announced two multi-million dollar settlements under SCRA, including a $20 million settlement with Bank of America/Countrywide to resolve allegations that the servicer unlawfully foreclosed on approximately 160 servicemembers. This is the largest SCRA settlement ever reached. The Division also resolved allegations that Bank of America charged servicemembers interest in excess of 6 percent on credit card debt, in violation of the SCRA.
The men and women of the military bravely serve our nation and they should know that we have their backs at home.
In all these matters, however, there are some important lessons learned for those in industry. As a former criminal prosecutor, I do not believe that discretion is a four-letter word. In that context, I saw first-hand the benefits of providing front line decision-makers with flexibility. However, when you give that flexibility you also have to give guidance about how and when it should be used. You need to monitor the use of discretion to ensure compliance with fair lending laws, including by ensuring that the reasons for decisions are properly documented.
Some argue that racial disparities in interest rates or fees may be explained by some non-discriminatory variable, such as credit score. This may be the case, and as I noted earlier, if a lender can demonstrate a non-discriminatory explanation, then the matter would be closed. However, if a lender, whether it is a redlining case, or a pricing case, does not have sufficient internal controls in place to monitor fair lending compliance, it becomes difficult, if not impossible to make these judgments.
It is the stubborn persistence of race as a factor in the pricing of loans, even after you account for relevant creditworthiness factors, that we seek to address through our enforcement actions. According to the Center for Responsible Lending, even when you control for credit score, African-American and Latino borrowers are far more likely than similar white borrowers to get risky loan products. And the disparity grows as you move up the credit score ladder with the largest disparities for African-American and Latino borrowers with credit scores over 680. All too frequently, equal credit opportunity remains elusive for minorities, even upper income minorities who are creditworthy.
Self-policing and lender compliance efforts are essential, not just when discretion is in play but in the full-range of decisions made by a lender. For example, when Citizens acquired Republic Bank and it decided to adopt Republic Bank’s CRA assessment area for the Detroit area that represented a failure of internal controls and compliance.
The importance of internal controls and compliance is why we are reaching out to those within the industry - to join with us in ensuring a fair lending environment for all. Since I started this job over two years ago I have made outreach a priority.
My colleagues in the Civil Rights Division and I have spoken at numerous industry conferences and met frequently with stakeholders to explain our priorities, as well as the evidence and theories underlying our enforcement actions. As has been the case for several years, Civil Rights Division attorneys will appear on multiple panels at this year’s Colloquium and will have the opportunity to provide substantial detail about our work. We welcome additional opportunities to discuss our fair lending enforcement work.
We have prioritized outreach because we recognize the critical role that outreach plays in promoting compliance with the law. The best policing is often policing that comes from within. I know that many people attending the Colloquium are working very hard to promote fair lending and to ensure that their institutions comply with the law. Your work is vital to ensuring fair and equal treatment for borrowers. And the success of compliance work and careful attention to fair lending is reflected in the fact that the overwhelming majority of lenders do not engage in discriminatory conduct. But everyone in the industry suffers if bad actors are not held accountable. This is why my aunt who runs the community bank in Wisconsin, and many other banking leaders, have told me that they are pleased the Department of Justice’s Civil Rights Division is again open for business.
I have thoroughly benefited from the listening sessions we have conducted with industry stakeholders. Outreach is mutually beneficial; it gives us an opportunity to explain how we conduct our investigations, address perceptions and misperceptions about our work, and learn from you. I would love if our outreach and your compliance efforts were so successful that I had no cases to bring.
Here is what I have learned:
First, you want transparency in our processes. I agree, and this is why our settlement agreements are all available on the web; our legal theories have been outlined today, and we are available to answer questions at any time.
Second, you want decisions to be made in a prompt fashion, because the cloud of uncertainty that looms during the pendency of an investigation can take a toll. I appreciate this concern, which is why we have put in place a policy setting a goal that, upon receiving a referral from a regulatory agency, we will make an initial determination about whether to open an investigation or return the matter to the regulator within 90 days of receiving the referral.
Third, you are uncertain about the legal theories we are using. We have two legal theories that we use to prove claims of discrimination: intentional discrimination and disparate impact. Both theories have been widely accepted by the courts, including every federal circuit court of appeals that has considered the issue.
Fourth, you want fairness. I agree as well. In every case before us, we conduct a thorough, independent review of the fact, and follow the facts where they lead us. As I mentioned earlier, the vast majority of our referrals get sent back to the regulator for administrative action.
Finally, you want the ability to communicate with us in an open fashion. Communication is the lifeblood of effective problem solving.
The foreclosure crisis has impacted communities across the country and we all have a shared interest in helping them rebuild. We can see hope in innovative strategies like land banks in use in Cleveland, Ohio and programs that many servicers participate in donate REO properties to local non-profits and government. Putting people back to work and housing back in use will benefit us all.
For these communities to recover it will take the combined forces of federal, state, and local government, the lending industry, and community-based organizations working together. This is a critical fight one that we must all fight together and one from which we will all benefit when our communities are rebuilt and become vibrant places once more.