The United States District Court for the Eastern District of Virginia recently signed a consent order (the “Consent Order”), approving a $21 million settlement in relation to allegations brought by the U.S. Department of Justice against SunTrust Mortgage Inc. (“SunTrust Mortgage”), alleging that SunTrust had increased loan prices for African-American and Hispanic borrowers. United States v. SunTrust Mortgage, Inc., No. 3:12CV397 (E.D. Va. June 26, 2012). As part of the Consent Order, SunTrust Mortgage agreed (1) to maintain policies and monitoring in order to reduce disparities in loan pricing based on race or national origin, and (2) to compensate certain Hispanic and African-American borrowers.

Background

SunTrust Mortgage is one of the nation’s largest mortgage lenders, and originated between 120,000 and 200,000 mortgage loans between the years 2005-2009, with an annual principal value of more than $30 billion. In 2007, the Federal System Board (the “FRB”) conducted a fair lending review of SunTrust Mortgage’s mortgage pricing practices, and determined that SunTrust Mortgage had “engaged in a pattern or practice of mortgage pricing discrimination based on race, color and national origin in violation of Section 701(a) of the Equal Credit Opportunity Act and the Fair Housing Act for loans made in 2005 and 2006.” In December 2009, the FRB referred the matter to the U.S. Department of Justice pursuant to 15 U.S.C. § 1691e(g).

The Parties’ Contentions

The United States brought suit against SunTrust Mortgage alleging that it had violated the Equal Credit Opportunity Act (the “ECOA”) and the Fair Housing Act (the “FHA”) as a result of discriminating “on the basis of race and national origin,” which it determined “based on the interest rates, fees, and costs paid by African-American and Hispanic borrowers who received loans from its retail and wholesale lending channels.” SunTrust Mortgage denied the allegation, and argued that “any differences in pricing were attributable to legitimate, non-discriminatory factors.” In settling the lawsuit, SunTrust Mortgage maintained that it agreed to the entry of the Consent Order so that it could voluntarily resolve the claims and “avoid the costs, risks, and burdens of litigation.”

The Consent Order

The Consent Order contains a multitude of provisions aimed at preventing racial discrimination in connection with Sun- Trust Mortgage’s present and future lending practices, and compensating victims of SunTrust Mortgage’s past discriminatory lending practices. First, the Consent Order contains an injunction that forbids SunTrust Mortgage’s “officers, employees, agents, assignees, successors in interest, and all those in active concert or participation with any of them,” from engaging in the “adoption, performance, or implementation of any policy, practice, or act that results in discrimination on the basis of race or national origin in the charging of loan prices . . . to those who borrow money secured by residential real estate in violation of the FHA, or in violation of the ECOA.”

The Consent Order contains several “Lending Policies and Procedures,” including the prohibition of SunTrust Mortgage employees and mortgage brokers from receiving compensation based on the terms or conditions of loans that are secured by residential real estate, and the requirement that SunTrust Mortgage maintain standards to avoid discrimination based on the race or national origin of a borrower, including the maintenance of several policies previously adopted by SunTrust Mortgage. Further, “an appropriate manager, under the supervision of a designated senior official of the Defendant” is required to ensure compliance that loan practices do not “vary materially by race or national origin without a legitimate nondiscriminatory explanation for such variation.”

The Consent Order also requires a monitoring program to ensure that SunTrust Mortgage is in constant compliance with the Order. The monitoring program, which must be in place for the duration of the Order, (which will be “3 months after the submission of the Defendant’s sixth semi-annual report”), must “maintain no less than its currently existing level of fair lending auditing and monitoring detailed” in SunTrust Mortgage documents entitled “Fair and Responsible Banking: Mortgage Pricing Regression Analysis (Retail)” and “Fair and Responsible Banking” Mortgage Pricing Regression Analysis (Broker),” which were provided to the United States on May 11 and 14, 2012. The program, “at a minimum,” must monitor “APRs, overages, subsidies, and total broker compensation,” and an “analysis designed to detect significant unexplained disparities in the price charged for its residential loan products by race and national origin, with respect to all loans secured by residential real estate originated in the Defendant’s name.” SunTrust Mortgage’s senior managers must review the program on a quarterly basis, and a report on the quarterly review must be presented to a committee of SunTrust Mortgage’s board of directors. SunTrust Mortgage is required to take corrective action if disparities exist, and if the United States objects to SunTrust Mortgage’s remedial actions, SunTrust Mortgage is required to meet and confer with the United States to address its concerns. If the meet and confer is unsuccessful, either SunTrust Mortgage or the United States may bring the dispute to court for resolution. The Consent Order mandates that SunTrust Mortgage provide access to a copy of the Order and its policies to “management officials and employees who participate in taking applications for, originating, or pricing loans secured by residential real estate, including employees who have significant contact with or oversight of mortgage brokers.” SunTrust Mortgage must also provide these persons with equal credit opportunity training, which includes training on “the terms of the Order, the policies referenced therein, the requirements of the FHA, the ECOA, and his or her responsibilities under each.” The United States must approve the content of the training program in advance, and each participant in the training program must complete an assessment in order to ensure that he or she “understands his or her legal responsibility not to discriminate.”

With regard to the monetary portion of the settlement, the Consent Order requires that SunTrust Mortgage place $21 million in escrow “to compensate for alleged monetary damages aggrieved persons nationwide may have suffered as a result of the alleged violations of the FHA and the ECOA.” SunTrust Mortgage must provide data requested by the United States in order to identify these persons, and “the United States shall, upon reasonable notice, be allowed access to mortgage loan files and borrower contact information contained in servicing records of the Defendant, the Defendant’s parent, or any entity owned by the Defendant’s parent for loans the Defendant originated between 2005 and 2009.” The United States, in turn, must locate “each allegedly aggrieved person” within 90 days of receiving such information from SunTrust Mortgage and must also determine the amount that each person should receive from the settlement fund. No payments shall be delivered until the person receiving settlement funds executes and delivers a release.

The Consent Order also requires that SunTrust Mortgage retain all records relating to compliance with the Order, and provides that the United States has the right to review such records upon request. SunTrust Mortgage must also automatically provide the United States data that it submits to the Federal Financial Institutions Examination Council pursuant to the Home Mortgage Disclosure Act and the Community Reinvestment Act, in addition to semi-annual reports regarding its progress in completing the various mandates of the Order.

By the terms of the Consent Order, the Order will terminate “3 months after the submission of the Defendant’s sixth semi-annual report,” however the United States may make a motion to extend the terms of the Order. If SunTrust Mortgage complies with the terms of the Consent Order, it shall resolve all claims by the United States “of discrimination . . . raised in the Complaint’s allegations of a pattern or practice, in loans originated between January 1, 2005 and December 31, 2009 by the Defendant, of discrimination against African-American and Hispanic borrowers based on racial and national origin disparities in loan prices.”

Conclusion

Entities that engage in providing residential loans must ensure that the terms of the loans they provide are consistent, regardless of the race or national origin of the borrower. If an entity engages in lending practices that violate the FHA and ECOA, it should prepare for potential prosecution by the United States, which may lead to the United States having expansive oversight over the lending practices of such entities. To prevent court-ordered government oversight, entities should consider implementing policies similar to those implemented through the Consent Order. Policies to prevent discrimination, monitoring programs, and training to all employees, may prevent both monetary sanctions and courtordered regulations to ensure compliance with federal law.