Be careful of the company you keep. The U.S. Department of Justice (DOJ) and Consumer Financial Protection Bureau (CFPB) are holding Provident Funding Association, L.P., liable to the tune of $9 million for alleged violations of the Fair Housing Act and Equal Credit Opportunity Act committed not by Provident, but by independent mortgage brokers from whom Provident obtained its mortgage loan transactions from 2006 to 2011.
Provident is a non-bank wholesale lender licensed in 25 states and the second-largest private mortgage lender in the country. Provident denied the allegations and maintained it did not receive any of the fees charged by the mortgage brokers. Nevertheless, the DOJ and CFPB countered that “It was Provident’s business practice to give the mortgage brokers who generated loan applications for it the subjective and unguided discretion to determine the total broker fees they would charge,” which “resulted in African-American and Hispanic borrowers paying more than white borrowers for home mortgage loans….”
The statistical analysis conducted by the government showed that African-American borrowers paid at least $858 more in total broker fees and Hispanic borrowers paid at least $615 more in total broker fees than white borrowers on the average home loan amount Provident originated. Even though the fees were paid to mortgage brokers and not to Provident, the DOJ and CFPB alleged that Provident engaged in a pattern or practice of lending discrimination and denial of borrowers’ rights “by allowing its wholesale mortgage brokers to charge African-American and Hispanic borrowers higher broker fees than non-Hispanic white borrowers.”
Provident agreed to settle the case by entering into a consent order consisting of four parts — an action plan, a monitoring program, an equal credit opportunity training program and a monetary relief. Since Provident had already changed its mortgage broker compensation plan years ago to comply with the CFPB’s loan originator compensation and QM rules, the action plan merely requires Provident to continue its current mortgage broker compensation policy.
But as recompense for its 2006 to 2011 failure to control the fees independent mortgage brokers negotiated with borrowers, Provident will have to establish a $9 million settlement fund and pay back aggrieved borrowers. Of course, the DOJ and CFPB will determine who is an aggrieved borrower as well as how much Provident will have to pay each one.
Prior enforcement actions and CFPB bulletins have made it clear that the CFPB will not hesitate to hold a financial institution responsible for violations of federal consumer financial laws committed by its service providers. Wholesale lenders have a responsibility to oversee the business practices of mortgage brokers in the same manner that they oversee the business practices of their other third-party service providers. Further, this case illustrates the risks that retail originators may face by allowing unfettered pricing discretion to their remote branches.
For more information on this case, read the CFPB press release.