Major correspondent settles discrimination suit, but claims DOJ got it wrong

by Ryan Smith30 Sep 2013

A major correspondent and wholesale mortgage lender will have to pay $3 million to aggrieved borrowers as part of a settlement with the federal government over alleged discriminatory lending practices. 

Although denying any wrongdoing, Plaza Home Mortgage has also been required as part of the settlement to institute several anti-discrimination policies.

The Justice Department accused Plaza,a California lender with regional offices across the nation, of allowing its brokers to charge black and Hispanic customers hundreds of dollars more for loans than white customers --a violation of the Fair Housing and Equal Credit Opportunity acts, according to the complaint.

“From 2006 through at least 2010, Plaza charged thousands of African-American and Hispanic wholesale borrowers higher fees than non-Hispanic white (‘white’) borrowers,” the complaint read.“The higher fees werenot based on their creditworthiness or other objective criteria related to borrower risk, but because of race or national origin.”

The lawsuit stated that Plaza had a two-step process for pricing a wholesale loan that it originated. In the first step, a base rate was established using “numerous objective credit-related characteristics.” Plaza sent its brokers daily rate sheets which communicated the base rates based on an applicant’s credit characteristics, as well as the yield spread premiums that Plaza paid to the broker when the loan application requested an interest rate exceeding the base rate.

However, according to the complaint, “Plaza’s second step of pricing wholesale loans permitted mortgagebrokers to exercise subjective, unguided discretion in setting the amount of broker fees charged to individual borrowers, unrelated to an applicant’s credit risk characteristics. … Mortgage brokers exercised this fee pricing discretion Plaza gave them, untethered to any objective credit characteristics, on every loan they brought to Plaza for origination and funding. Plaza affirmed or ratified these discretionary fee pricing decisions for all the brokered loans it originated and funded. Further, Plaza did not conduct any type of broker monitoring to determine whether there weredisparities between the total fees charged to minority and white borrowers.”

Plaza President and CEO Kevin Parra, however, said he felt the DOJ’s study was flawed.

“The DOJ took an aggregate approach, so they would compare different brokers. If Broker A charges the same amount to every borrower and Broker B charges the same amount to every borrower, but Broker B charges a higher amount and he happens to be in an ethnic neighborhood, that’s a disparity,” Parra told MPA Friday. “We respect the DOJ, but we feel they were completely incorrect in their conclusions. The Supreme Court is currently looking at a case that’s trying to decide whether this disparate impact theory is valid. … I respectfully disagree with (the DOJ), and the Supreme Court will likely make the final judgment.”

The court is currently considering the case of Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., which questions whether disparate impact claims are cognizable under the Fair Housing Act.

Parra also stressed that any disparities were at the independent broker level.

“The DOJ’s claim was focused on the fees that independent mortgage brokers charged their customers,” he wrote in a Sept. 26 letter to Plaza customers.“During the timeframe in question, competitive market conditions mandated our industry to allow independent mortgage brokers to negotiate their compensation directly with their borrower-customers.”

Despite Plaza’s disagreement with the DOJ, Parra said the company had taken steps to prevent its brokers from discriminating in the future.

“Throughout the DOJ inquiry, Plaza continued its focus on compliance, implementing andenhancing policies designed to minimize any unfair broker compensation disparities,” he wrote.

Among the steps taken was the hiring of a consumer rights law firm to help implement Plaza’s compliance policies, the implementation of a monitoring program to help detect broker fee disparities, and a partnership with a consortium of nonprofit housing organizations to review the company’s policies and suggest ways to prevent housing discrimination.

“Plaza also began to develop a nationwide lending program intended to accommodate traditionally underserved communities,” Parra wrote.“The mission of the program is to providecommunities with financial literacy training, home ownership instruction and access tomore affordable credit in the acquisition of housing.”

The settlement is subject to approval by the U.S. District Court for the Southern District of California.

COMMENTS

  • by Gordon Schlicke | 9/30/2013 1:16:02 PM

    Disparate impact is a hammer Eric Holder is using against us. If the Supremes confirm the theory, prepare to spend a ton of money on up front in-depth analyses to defend yourself. it will become a battle of statisticians. And you are paying for it. They know this.

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