The opening bars of the Obama Administration's fair-lending enforcement overtures have a somewhat familiar air to them, to Paul Hancock. That shouldn't be surprising. Hancock played a big part in the composition of the Department of Justice's approach to fair-lending. Hancock was Chief in the Housing and Enforcement Section of the department's Civil Rights Division, and his signature was among those on the complaint and consent decree of the very first federal mortgage-related fair-lending case pressed under the Equal Credit Opportunity Act. The allegation in U.S. v. Decatur Federal Savings & Loan case was that the thrift had applied stricter underwriting standards to African-Americans than to white applicants. The $1 million settlement reached in the 1992 case resonated throughout the home-lending industry, and was the first of a string of federal settlements between banks and Justice.
While many trace the roots of aggressive federal fair-lending enforcement to the Clinton years, Hancock and his colleagues brought the Decatur case during the Administration of George H.W. Bush. Now, with a Democratic President very focused on the mortgage mess, and equal rights; an Attorney General who has left no room for doubt where he stands; and a nominee for Assistant Attorney General for Civil Rights who is a former civil rights prosecutor coming off major involvement in the foreclosure crisis, Hancock reaches an inescapable conclusion. "We'll have aggressive enforcement of fair lending in this Administration," says Hancock, now partner in the Miami law offices of K & L Gates LLP. Hancock and other experts interviewed believe that banks will see increased attention not only on the bread-and-butter issues that the government has stressed for decades, but also on new wrinkles brought about by the mortgage crisis--including, somewhat paradoxically, the effort to refinance or modify troubled mortgage borrowers. (For an update of last month's Compliance Clinic on loan modifications, see http://tinyurl. com/LoanModClinic)
Scoping out fair-lending changes
While the basic theme of federal fair-lending enforcement will be the same, the approach will differ in some ways from the past, experts predict. Banks both large and small have lent their names to a string of fair-lending cases. More will join them, the experts say, as cases that have been pending at the Justice Department for years will be moved forward and very publicly pursued.
"There's a bunch of live cases over there," especially those based on referrals by banking regulators, when they find a pattern or practice of discrimination, says Lucy Griffin, a compliance attorney and consultant with extensive experience at multiple Washington agencies and ABA, and ABA BJ contributing editor. She is president, Compliance Resources, Inc., Reston, Va.
There will be another shift that bankers will need to watch, and prepare for, as well. Thus far in its history, fair-lending enforcement has concerned exactly that--lending. The main focus has been on the up-front elements and errors of the lending process: redlining, marketing, pricing, loan decisionmaking, etc.
In today's circumstances, Hancock and others predict, the servicing end of the process, especially in the mortgage arena, will feel the heat of the spotlight.
Institutions modifying loans independently or under the Obama Administration's special programs, will need to do so carefully. Indeed, experts interviewed warn that dangers lurk in credit in general where lenders try to apply the lessons of today's debacle to future decisions.
Bush years reconsidered
To assess where the Obama years may take fair-lending issues, one needs to examine the recent past. Typically, the George W. Bush Justice Department's efforts in fair-lending get painted as a failure.
A particularly damning statement was made by the bipartisan Report of the National Commission on Fair Housing and Equal Opportunity in December:
"Litigation by the Department of Justice challenging lending discrimination has . …