Provident Charged with Discrimination on Loans from 2006 to 2011
Provident Funding Associates has been charged by two federal agencies with charging higher broker fees to minority borrowers. The Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) filed the joint complaint asking the court to require the California lender to pay $9 million in damages to African American and Hispanic borrowers the agencies say were harmed.
Provident originates mortgage loans through a nationwide network of brokers. Last week's complaint alleges that between 2006 and 2011, Provident, which made over 450,000 mortgage loans during the period, set base or par rates for its various loan products reflecting the company's assessment of individual applicant creditworthiness, current interest rates, and what investors were willing to pay for the loans. These rates were published on sheets provided to brokers who were also given schedules of yield spread premiums (YSP) Provident would pay brokers who originated higher priced loans. The fees paid to Provident's brokers were thus made up of two components: payments by Provident from increased interest revenue and from the direct fees paid by the borrower.
Creditors are prohibited by the Equal Credit Opportunity Act from discriminating against applicants in credit transactions on the basis of characteristics such as race and national origin. In the complaint, the CFPB and DOJ allege that Provident violated the act by charging African-American and Hispanic borrowers more in total broker fees than white borrowers based on their race and national origin and not based on their credit risk. The agencies allege that these discretionary broker compensation policies caused the differences in total broker fees, and that Provident unlawfully discriminated against African-American and Hispanic borrowers in mortgage pricing. Approximately 14,000 African-American and Hispanic borrowers paid higher total broker fees because of this discrimination.
The DOJ also alleges that Provident violated the Fair Housing Act, which also prohibits discrimination in residential mortgage lending.
In addition to the $9 million in damages the consent order also requires Provident to pay for the services of a settlement administrator to distribute the funds and to hold in place its current policy (Provident said it changed its broker compensation policy in response to regulatory developments in 2010 and 2011) which does not allow discretion in borrower- or lender-paid broker compensation because individual brokers are unable to charge or collect different amounts of fees from different borrowers on a loan-by-loan basis. The consent order also requires that Provident continue to have in place a fair lending training program and broker monitoring program.
According to Richard Andreano, Jr., writing in Ballard and Spahr's CFPB blog, the consent order requires brokers to disclose to applicants (a) the full amount of broker compensation, stated separately for lender-paid or borrower-paid fees, and whether or not that compensation is negotiable, and (b) a specified notice of non-discrimination.
Andreano also says, "The consent order indicates that under Provident's current broker compensation policy, brokers cannot charge different amounts of fees to borrowers on a loan-by-loan basis because each broker (a) must periodically select its compensation level as a percentage of loan amount, up to a maximum percentage or dollar amount, (2) must charge the percentage or dollar amount it has selected to each loan application it submits to Provident during the applicable period, and (c) may not charge any other fee in connection with originating a Provident loan."
The consent order requires approval of the court and the two agencies filed that order with the United States District Court for the Northern District of California. The complaint is not a finding or ruling that the defendants have actually violated the law. On December 6, 2012, the CFPB and the DOJ signed an agreement that has facilitated strong coordination between the two agencies on fair lending enforcement, including the pursuit of joint investigations such as this one.
CFPB Director Richard Cordray said, "Consumers should never be charged higher fees because of their race or national origin. We will continue to root out illegal and discriminatory lending practices in the marketplace. I look forward to working closely with our partners at the Department of Justice to ensure consumers are treated fairly."
"The Civil Rights Division is committed to ensuring that all types of lending institutions, including wholesale mortgage lenders, comply with the fair lending laws," said Principal Deputy Assistant Attorney General Vanita Gupta of the Justice Department's Civil Rights Division. "We look forward to further collaboration with the Bureau in protecting consumers from illegal and discriminatory lending practices."