Justice's New War Against Lenders
The Obama administration repeats mistakes of the past by intimidating banks into lending to minority borrowers at below-market rates in the name of combatting discrimination.
Talk about not learning from past mistakes: A government department is again intimidating banks into lending to minority borrowers at below-market rates, all in the name of combating "discrimination." Welcome to the next housing mess.
The 1990s may have brought us supercharged politicized lending, but Eric Holder's Department of Justice is taking the game to an entirely new level, and then some. The weapon is a "fair lending" unit created in early 2010, led by special counsel Eric Halperin and overseen by Civil Rights Division head Thomas Perez.
A sampling of Mr. Perez's thinking, from April 2010 congressional testimony: "The foreclosure crisis has touched virtually every community in this country, but it disproportionately touches communities of color, in particular African-Americans and Latinos." And: "[C]ross burnings are the most overt form of discrimination and bigotry. Lending discrimination is some of the most subtle. It's what I call discrimination with a smile."
Even for the Obama administration's antidiscrimination cops, this is a shocker: A political appointee who's supposed to neutrally enforce the law loosely equates bankers with Klu Klux Klan thugs. But let's move from what may be Mr. Perez's personal bias, and focus on the broader brush strokes of the Justice Department—which seem designed to paint bankers into a corner.
Lenders who discriminate on the basis of race and those who make decisions on the basis of credit scores are two entirely different animals. The former our society doesn't permit, for moral reasons; the latter we encourage because it's fundamental to capitalism. A lender will go bust if he can't distinguish between a risky loan and a good loan. Poor people aren't well-served by getting loans they can't afford.
Historically, fair-lending cases have fallen into roughly two categories: "price discrimination" cases, in which lenders are accused of charging minorities higher prices than other clients, and "red-lining" suits, in which they are accused of intentionally failing to serve minority communities. Sounds straightforward for those who seek to obey the law.
Assistant U.S. Attorney General Thomas Perez testifies before a Senate committee on civil rights, March 29.
But not when Justice revives "disparate impact" theory: the idea that even if lenders don't actively discriminate, they can still be sued if the cumulative effect of their actions implies discrimination. The latter is usually "proved" through statistical analysis (and the old standard—discriminatory intent—is thrown out the window). The Bush administration largely declined to pursue these cases.
And for good reason. Consider two AIG subsidiaries that Justice alleged "failed to supervise or monitor brokers in setting broker fees" between 2003 and 2006, but that Justice didn't pursue aggressively until the Obama administration. The government claimed that, in aggregate, African-Americans were charged more than other ethnic groups. AIG settled in March 2010 while it was under federal ownership, and Mr. Perez gained a big legal stick in price-discrimination cases. Suddenly lenders may be held liable for other people's business practices, even if those business practices aren't individually discriminatory.
Justice is pushing the legal envelope on red-lining, too. In a July 1 letter to Cardinal Financial Corp., Justice contends that after the bank bought George Mason Mortgage in 2004, it "failed to serve predominantly black areas on an equal basis with predominantly white areas" by not opening branches in majority-black areas or engaging in "effective outreach activities." Justice wants the bank to add nine counties to the Federal Deposit Insurance Corp.-approved geographic area where Cardinal does business.
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Never mind that the FDIC in the past gave kudos to Cardinal for its lending practices. Justice is now accusing Cardinal of failing to open branches and achieve racial loan quotas in counties that its federal regulator never before contended should be the focus of its lending. We won't know the full facts of this complaint unless it goes to court. But what Justice is up to sounds like the same government-directed, quota-based lending push that brought us the last housing boom and bust.
Many companies are simply rolling over and paying once they realize the extent of the possible PR horror show. "Banker" is a bad word in today's political environment. Small and midsize banks depend heavily on their reputation and community ties, and they can't afford to be labelled racist. Many can't afford prolonged legal cases either, and the mere prospect of fighting the feds is intimidating. Mr. Perez knows all this.
Justice is employing some unusual tactics, too, including asking banks to sign confidentiality agreements in certain circumstances. Independent Community Bankers of America chief lobbyist Camden Fine complained in a letter to Mr. Holder Monday about this practice and its "troubling lack of transparency," adding that it's hard for banks to "assess and refine" their practices if they don't know Justice's legal arguments.
But Justice is on a roll. In less than two years, the government has settled with AIG ($6.1 million), PrimeLending ($2 million), Midwest BankCentre ($1.5 million) and Citizens Republic Bancorp ($3.5 million), to name a few. More cases are in the hopper, and bigger banks are now in Justice's sights.
All of this may boost the standing of Messrs. Perez and Halperin in the Obama administration. It's less good for the rest of us. These settlements include requirements that banks lend to minorities at below-market rates and, in effect, dish out cash to politically favored "community groups." It's a good bet that many of these loans will eventually go bad.
The Justice Department—or the bank, with the long arm of Justice hanging over it—chooses where that money goes. A Michigan judge even went so far as to call one proposed settlement "extortion." He might be onto something.
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