Reverse discrimination is unfair despite bank's good intentions

Nation's Housing

January 04, 2004|By KENNETH HARNEY

THIRTY-FIVE years after Congress passed the Fair Housing Act, do racial preferences and discrimination continue to exist in home mortgage finance? Are American homebuyers still charged higher rates or fees on their loans solely because of their skin color or racial heritage?

The unfortunate answer appears to be yes. But that discrimination doesn't always take the form you might assume. Case in point: Consider the recent federal court settlement of a class action suit involving a prominent savings bank that is an active player in the mortgage market nationwide.

Under the $1.2 million settlement in U.S. District Court in Indianapolis, the lending institution - Flagstar Bank, based in Troy, Mich. - admitted "no wrongdoing, liability or improper conduct." But its internal loan-pricing instructions distributed in writing to loan officers explicitly required them to charge different fees to different racial groups.

What is unusual, though, is that the instructions required loan officers to limit the fees they charged African-American and Hispanic homebuyers while allowing higher fees to be charged to white borrowers. Here is what Flagstar's "Revenue Per Loan Procedure" policy required of loan officers:

Minority homebuyers could be charged no more than 3 percent in loan origination fees or "points," but white applicants could be charged 4 percent.

Loan officers whose "revenue per loan average" from mortgages made to minority applicants exceeds their "non-minority [white] average" will be subject to disciplinary actions, including probation and termination.

"Non-minority will be defined as any borrower who is determined on the loan application to be white, not of Hispanic origin."

Since the advent of the fair housing law in 1968, dozens of cases have gone to federal courts involving charges of racial discrimination against minority homebuyers. Lenders, insurance companies and others have been accused of charging minorities - primarily African-Americans - higher mortgage fees or rates, or "redlining" entire minority neighborhoods by ceasing to offer mortgages there. But cases alleging intentional, enforced policies of unequal pricing against white homebuyers - reverse discrimination - are relatively rare.

A Flagstar spokeswoman declined to comment on the settlement, noting that the company has a policy against discussing litigation.

However, Amy Ficklin DeBrota of Indianapolis, the lawyer for the plaintiffs, said the bank's loan pricing policy - initiated in May 2001 and discontinued at the end of January 2002 - caused higher mortgage fees to be paid by about 1,000 white mortgage borrowers during that period.

The affected borrowers would receive refunds and noneconomic damage awards from the proceeds of the $1.2 million settlement. The lead plaintiff will receive $10,000.

DeBrota said Flagstar's policy was discovered when one of its loan officers resisted following the pricing instructions, and was fired by the bank. The loan officer "felt that any sort of preferential treatment to one racial group over others violated the law," said DeBrota. "She refused to do that."

DeBrota, a specialist in employment and fair housing issues with the law firm of Young Riley Dudley & DeBrota LLP, sued the bank on the loan officer's behalf.

But when the implications of the underlying discriminatory pricing requirements began to sink in, DeBrota realized that potentially large numbers of non-minority borrowers had possibly been charged higher fees than minority applicants. She located a nucleus of plaintiffs and filed a class action on their behalf.

DeBrota believes that while racial preferences in mortgage lending may appear to favor one group over another, the reality is that "it is a lose-lose situation."

Those charged lower fees can also be harmed, she argues, "because it creates a disincentive to lend to them."

When loan officers stand to earn less from one category of borrowers than another, they will naturally tend to emphasize making loans to clients who will bring them the highest fees and income - white borrowers in this case.

The irony behind the Flagstar loan pricing policy? Though not confirmed by Flagstar, DeBrota said the dual-standard loan fee policy originally was put into place as a way to avoid any appearance of discrimination against African-American and Hispanic borrowers.

Auditors from the federal Office of Thrift Supervision had warned the bank about a possible pattern of higher fees to minority applicants, according to DeBrota. The resulting policy instruction to loan officers - the "Revenue Per Loan Procedure" - had a subtitle: "Monitoring Fair Lending Practices."

The way to achieve fair lending for minorities, in other words, was to enforce a policy of higher-fee lending to non-minorities.

That's not exactly what Congress had in mind back in 1968. Fair means equal. Period.

Ken Harney's e-mail address is kharney@winstarmail.com.

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