DoJ Mortgage Probes May Overextend Authority: K&L Gates

The Department of Justice (DoJ) initiative to beef up investigations of discriminatory mortgage lending and servicing practices will result in more numerous and forceful reviews of mortgage lenders and servicers, including investigations that appear to merge fair lending and consumer protection principles, according to an analysis of the proposal written by global law firm K&L Gates. The firm also warns that the DoJ may be over-extending departmental authority in doing so. During a speech at the RainbowPUSH Coalition’s Annual Wall Street Conference earlier this month, DoJ’s assistant attorney general for the civil rights division Thomas Perez announced the creation of a new unit in the department’s civil rights division is already investigating 38 allegations of reverse redlining, the practice of targeting minority or economically disadvantaged borrowers for high-cost loan products. In addition, the Justice Department also has plans to review loan modification data the Treasury Department compiled on the Making Home Affordable Modification Program (HAMP) to analyze whether minority borrowers receive less favorable terms or conditions than comparable non-minority borrowers in their quest for a loan modification. Perez said the department is “dusting off the Fair Housing Act and the Equal Credit Opportunity Act” by creating a Fair Lending Unit within the Civil Rights Division’s Housing and Civil Enforcement Section and pledged to step up federal efforts to investigate discriminatory and fraudulent lending and servicing practices, including the renewed focus on reverse redlining. Perez equated lending discrimination to cross-burning, saying he sees no difference, at least in effect, between these acts and discriminatory lending. The latter, being merely “discrimination with a smile” and the “corrosive power of fine print is every bit as destructive as the cross burned in a neighborhood.” “The department’s fair lending initiative is multi-faceted and appears to merge lending discrimination and consumer protection into a blended enforcement initiative,” a trio of K&L Gates attorneys, lead by partner Paul Hancock, wrote. “Perez’s announcement reaffirmed the department’s commitment to investigate traditional cases of lending discrimination, such as denials or differing terms of credit because of race or national origin.” Typically consumer protection enforcement has been enforced under the purview of the Federal Trade Commission (FTC), and Hancock wrote Perez’s goals may stretch the statutory authority of the Civil Rights Division. “Perhaps he will only prosecute this consumer protection initiative in the context of claims of racial or ethnic discrimination, but his speech gave strong indications that the two concepts—anti-discrimination and anti-fraud—will inhabit overlapping, but not coterminous, spheres,” Hancock wrote, adding lenders should expect Perez’s office will stretch the limits of the DoJ’s authority and seek an enforcement option for all situations that believed to be discriminatory or unfair. The Justice Department program isn’t the only initiative to study housing discrimination. The House Financial Services Subcommittee on Housing and Community Opportunity considered House Resolution (H.R.) 476, the Housing Fairness Act of 2009, which would authorize $20m annually for a nationwide study of discrimination in housing and mortgage lending. Write to Austin Kilgore.