Back in the Sub-Prime Mortgage Habit

In the Obama administration, intent of racist lending practices doesn't have to be proven.

One might be inclined to think that an economic meltdown caused by irresponsible mortgage underwriting would be a “‘lesson learned” of the first order. One might think a federal government which has largely escaped well-deserved blame for its part in pressuring banks to relax loan standards for minority applicants, in order to avoid charges of racism, would never reprise such an ill-conceived concept. One might think a U.S. Department of Justice neck-deep in a Mexican gunrunning scandal and unresolved charges of reverse-discrimination for dropping a voter intimidation case against Black Panthers would be chastened by such disclosures. One would be completely wrong: the DOJ is once again strong-arming banks to make risky loans to minority applicants, or face charges of discrimination.

The pressure is yielding results. Prosecutors from the department have succeed in wresting more than $20 million in set-asides from lending institutions apparently intimidated by such pressure: the funds were raised in out-of-court settlements with banks fearful of being branded racist for maintaining sensible loan standards. Another 60 banks are in the DOJ’s cross-hairs.

How dubious are these loans? Once again, prime mortgages are being set aside for minority applicants with questionable credit. And once again, as incomprehensible it was the first time, “valid” income considerations for obtaining a mortgage will include “welfare payments, and unemployment benefits.” Former Rep. Ernest Istook, a Heritage Foundation fellow, illuminates the insanity. ”It’s absolutely outrageous after what we’ve just gone through,” said Istook. ”How can someone both be financially stable enough to merit a mortgage at the same time they’re on public assistance? By definition, you don’t have the kind of employment that can support such a loan.”

Such concerns are irrelevant for a Justice Department that sees racial bogeymen wherever it turns. Many of the banks they sued have been ordered to post notices in all their branches and on advertising material notifying minority customers that they cannot be turned down for a loan simply because they’re on the government dole. Justice Dept. spokeswoman Xochitl Hinojosa, while noting that such pressure “does not compel the banks to make loans to people who do not qualify,” contended such lending is “essential to remedy the harmful effects of the banks’ conduct.”

Toward that end the DOJ has created a new entity called the Fair Lending Unit, comprised of more than 20 lawyers, economists and statisticians. It is headed by Special Counsel for Fair Lending, Eric Halperin, who answers to Civil Rights Division chief Tom Perez. Both men worked for former Attorney General Janet Reno. How credible is Perez? He is the man who once likened lending institutions to the Klu Klux Klan, saying their racism with respect to mortgages is ”every bit as destructive as the cross burned in a neighborhood.” He was also responsible for dropping the case against the two Black Panthers involved in voter intimidation in Philadelphia – after it was already won.

More importantly, with respect to minority lending, Mr. Perez is pursuing policies best described as a schizophrenic. At a meeting hosted by the Brookings Institution in June of 2010, Mr. Perez spoke about a housing crisis “fueled in large part by risky and irresponsible lending practices that allowed too many Americans to get unsustainable or unaffordable home loans.” He then claimed that while the crisis affected everyone, “communities of color have been hit particularly hard, and have suffered greater consequences.” In other words, the same lending institutions which had lowered credit standards to make more mortgages available for minority applicants were at fault for higher default rates by those same applicants! And one year later, the DOJ is pursuing banks for not engaging in the same risky practices that led to the housing bust which disproportionally affected minority borrowers!

Perez blamed this disproportion on the fact that minority borrowers were put in more sub-prime loans than non-minorities with similar incomes, citing a New York Times study which noted that “a black household in New York City making more than $68,000 a year was almost five times more likely to have a subprime loan than whites with similar incomes.“ That certainly sounds unfair until one discovers the following reported by the Manhattan Institute’s Howard Husock:

A September 1999 study by Freddie Mac, for instance, confirmed what previous Federal Reserve and Federal Deposit Insurance Corporation studies had found: that African-Americans have disproportionate levels of credit problems, which explains why they have a harder time qualifying for mortgage money. As Freddie Mac found, blacks with incomes of $65,000 to $75,000 a year have on average worse credit records than whites making under $25,000.

Furthermore, a study conducted by insurance giant Prudential entitled the “African American Financial Experience” reveals that black Americans do not save as much money as white Americans do, especially with regard to retirement funds, even as they are “three times more likely to raid their 401(k) or other retirement plans to meet immediate financial needs.”

Again, one might think that such realties concerning credit and savings histories would diminish the Justice Department’s efforts to portray banks and other lending institutions as racist. It has, in an Orwellian sense. According to Investor’s Business Daily’s Paul Sperry, if the methodology used by the DOJ to allege racism by particular institutions is requested by the institutions themselves, they must sign a non-disclosure agreement to get it. Reginald Brown, partner at Wilmer Hale in Washington, who has represented banks in connection to recent race-bias investigations, explains why. ”They want you to sign something saying you agree, under the condition of any settlement with them, that you won’t disclose what their theories were. That’s because their theories are loopy and wouldn’t stand the light of day,” he said.

One is left to wonder how such secrecy squares with remarks made by Thomas Perez at Heritage, where he promised that the Justice Department will “continue its practice of building accountability into agreements…requiring transparency so that communities can monitor the progress being made.” Even more so, when Sperry notes that “Justice acknowledges in every case it did not prove charges of intentional discrimination, while banks have denied any wrongdoing.” He further notes that the department “has asked banks to keep its methodologies, which include computer-based statistical analysis, secret.” Justice has confirmed the allegation. ”In certain circumstances, when a bank has requested details of our analysis, the department has requested that a defendant agree to a confidentiality agreement,“ DOJ spokeswoman Xochitl Hinojosa told IBD.

What else is being kept a secret? For one, the list of “qualified organizations” Perez has required defendant lending institutions to bankroll with millions of dollars in funding, as part of the settlement agreements. One case in particular involved Midwest BankCentre, a small bank which has been operating in the suburbs of St. Louis for over a century. They are reportedly settling a case with the DOJ for failing to open branches or issue mortgages in minority areas. $1 million dollars is reportedly being set aside for African American applicants ”who would ordinarily not qualify for such rates for reasons including the lack of required credit quality, income or down payment.“ The organization which brought pressure on the bank? A community activist group calling itself the St. Louis Equal Housing and Community Reinvestment Alliance. Such pressure is reminiscent of the tactics that now-discredited ACORN and other community activist groups used to shakedown lending institutions prior to the housing crisis.

Such concessions are made possible by a sea-change in the Justice Department’s approach to prosecution. Rather than being held liable for particular loans they haven’t made to individual households, banks are being judged for the “secondary impact” such refusals have on an entire neighborhood. Thus, when First United Security Bank in Alabama settled with the DOJ in 2009 for alleged discriminatory practices, stipulations to fund community reinvestment and education programs were part of the deal. These included $600,000 to open a new branch in an African American neighborhood, $500,000 for a special financing program, and $110,000 for outreach to potential customers in the unserved areas.

And such considerations of secondary impact are not limited to mortgages. The DOJ is planning to extend their scrutiny into credit cards, auto loans, and even loan modification programs. Any violations which appear to be pattern-like will be referred to DOJ for prosecution based on a concept called “disparate impact.“ Disparate impact is defined as a “facially neutral practice that has an unjustified adverse impact on members of a protected class.” What does this mean with respect to litigation? Buckley/Sandler lawfirm co-chairman Andrew Sandler explains. “Perez is going to depend on disparate impact theory, where the intent [to discriminate] does not have to be proven,” he says.

But it gets even crazier. On one hand, it is against the law for banks to compile data on race, gender or age for nonmortgage loan applications. On the other hand, the Home Mortgage Disclosure Act requires the compilation of such data. Crazier still?  ”[DOJ is] expecting each bank to have a fair-lending risk assessment,” says Carl Pry, vice president and compliance manager at KeyBank in Cleveland. ”That is something relatively new–you won’t find it either in the regulations, in the statutes, and not in any of the exam procedures.”

So what does the DOJ expect banks to do? Collect “proxy data,” in which they amass minority applicant information based on ”geocoded neighborhood patterns, or guesswork based on gender or racial classification of a customer’s name” in order to determine if an applicant falls into a protected class. Such guesswork produces error rates as high as 40 percent in mixed neighborhoods. Furthermore, Mike Brauneis, director of regulatory risk consulting for Protiviti, a global consulting and internal audit firm, reveals the Orwellian nature of such data compilation. ”If we do an analysis and it suggests that fair-lending risk exists, those analyses can themselves be risks,” he said.

That such questionable data coupled with unprovable intent would be used by the racial bean-counters at that DOJ should surprise no one. It is merely the next link in the chain behind the department’s utter illogic of simultaneously blaming lending institutions for irresponsible lending practices that propelled the housing meltdown, even as they are arm-twisting those institutions to engage in them all over again.

Added to the Fast and Furious gunrunning scandal, and the failure to prosecute Black Panthers intimidating Philadelphia voters – a case which also included sworn testimony of systemic abuse by the department’s Voting Rights Section – and a very disturbing pattern emerges. Attorney General Eric Holder is running a Justice Department that is abusive, out of control, and possibly racist. It is also a department more than willing to stonewall any investigation into its operational methods. Any one of these abuses on its own would be enough to warrant Mr. Holder’s resignation. All three? Mr. Holder is either incompetent or corrupt.

Either way, it’s time for him to go.

Arnold Ahlert is a contributing columnist to the conservative website