The Department of Justice (“DOJ”) and GFI Mortgage Bankers, Inc. (“GFI”) recently entered into a Consent Order (the “Order”) in the Southern District of New York. The August 27, 2012, Order resolved claims that GFI had “engaged in a pattern or practice of discrimination on the basis of race and national origination by charging African-American and Hispanic borrowers higher interest rates and fees on home mortgage loans compared to the rates and fees charged to similarly-situated non-Hispanic white borrowers.”
Claims against GFI stem from a Department of Housing and Urban Development (“HUD”) fair lending investigation referred to DOJ by HUD in January 2010. The investigation included approximately 740 loans made between 2005 and 2009. The DOJ found that interest rates were significantly higher for African-American (19 to 41 basis points) and Hispanic borrowers (20 to 23 basis points), when compared to similarly situated non-Hispanic White borrowers. The DOJ also found that origination fees were 73 to 105 basis points higher for African-American borrowers and 27 to 56 basis points higher for Hispanic borrowers, when compared to similarly situated non-Hispanic White borrowers. GFI stipulated that these disparities were statistically significant and could not be explained by objective credit characteristics of the borrowers or the loan product features.
In the Order, GFI agreed to pay up to $3.5 million in financial remediation to affected borrowers. DOJ will be providing the final list of affected borrowers and amounts due to each, but if applied evenly across the entire potential population, GFI will pay $6,418 per loan.
With Discretion Comes Risk and Responsibility
Although the relevant time period pre-dates the Loan Officer Compensation Rule changes to Reg. Z (which eliminated overage as a component of loan officer compensation), lenders continue to have significant risk with allowing loan officers discretion in pricing individual loans. As long as loan officers have discretion in setting the interest rate or fees for a given loan, GFI demonstrates the potential for actionable disparities that cannot be explained by objective credit characteristics of the borrowers or loan product features. In the post Reg. Z LO Comp Rule environment this issue will likely arise around a comparison of similarly situated borrowers, some of whom receive a below par rate or fee waiver while others do not.
In the Order, DOJ sets forth restrictions on GFI loan officer’s discretion in setting interest rates or fees on a particular loan. Specifically, the Order requires GFI to adopt a standard schedule of fees and costs it retains for itself or pays to employees and: a) place a narrow objective limit on the amount of pricing discretion; b) document the specific interest reduction attributable to payment of discount points; c) if the loan officer proposes to price a loan outside of the limit of their discretion they must provide written nondiscriminatory justification for the variance and have it approved by a higher level manager; d) maintain the pricing sheet with all adjustments in every loan file; and e) adopt policies and procedures that require loan officers to explain the benefits and consequences of each loan product discussed with the borrower.
GFI is also required to disclose to borrowers a) the par interest rate used to price the loan; b) the full amount of all fees and costs retained by GFI; c) a statement of whether the borrower can negotiate the interest rate, fees or costs; and d) a specific nondiscrimination notice.
Back to Basics
GFI is required to establish a Fair Lending Monitoring program designed to monitor, at least quarterly, for potential unexplained pricing disparities based on a borrower’s race or national origin. If disparities are discovered at any level (employee, branch, or company-wide) GFI is required to take corrective action ranging from enhanced training to financial remediation for borrowers and termination of offending employees.
GFI is also required to provide annual fair lending training to its entire management staff and all employees who participate in the origination of mortgage loans.
And Then Some . . . .
GFI is required to employ a Director of Compliance, who shall be a member of GFI’s senior management. The Order stresses the responsibilities this individual will have in the realm of fair lending compliance, from developing and delivering training, to developing and implementing the monitoring program, creating fair lending policies and procedures, and addressing all fair lending complaints. DOJ reserves the right to review the qualifications of the person selected for this position in advance of the hire.
Practical Application (What Does it Mean for You?)
- Verify that your loan officer compensation plan does not allow for any form of compensation based on the terms and conditions of a loan.
- If your loan officers have discretion in setting rates or fees, document a narrow, objective limit on that discretion and require written documentation of nondiscriminatory reason(s) for the deviations from that limit.
- Document the specific reduction in interest rate attributable to a borrower’s payment of discount points and document the borrower’s understanding of the tradeoff between discount points and their interest rate.
- Develop a robust fair lending policy that includes monitoring for compliance and taking corrective action when necessary.
- Institute mandatory fair lending training on no less than an annual basis.
- Make compliance a senior level function in your organization, establish the “tone at the top.”
- The DOJ, CFPB and prudential regulators have made it exceedingly clear that fair lending is at the top of the list of their examination and enforcement activities.