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Wholesaler Liable for Broker Discrimination


March 5, 2010

By staff

The government has essentially settled with itself over alleged discriminatory practices by mortgage brokers on loans closed and funded through a defunct subprime wholesaler. The government claims the settlement marks the first time a wholesale lender has been held accountable for such broker behavior.

The U.S. Department of Justice announced yesterday that Wilmington Finance Inc. was among two companies to settle charges of discrimination against blacks. Wilmington's wholesale unit ended originations in June 2008 following the June 2006 consolidation of retail operations and the ouster of its founder and chief executive officer a month earlier.

The other company included in today's settlement was AIG Federal Savings Bank.

Both firms are subsidiaries of American International Group Inc. Since the government owns 80 percent of AIG, most of the settlement costs will impact its interests.

The settlement amount, $6.1 million, will be paid to borrowers who were discriminated against. AIG will also invest at least $1 million in consumer financial education efforts.

The settlement was announced in conjunction with a complaint filed yesterday by the government in U.S. District Court for the District of Delaware. The lawsuit alleges violations of the Fair Housing Act and the Equal Credit Opportunity Act.

As wholesale lenders, the defendants allegedly failed to monitor mortgage brokers who charged black borrowers higher fees than non-Hispanic whites on thousands of loans originated between 2003 and 2006.

"Lenders who looked the other way and ignored the discriminatory practices of brokers must be held accountable," Thomas E. Perez, assistant attorney general in charge of the Justice Department's Civil Rights Division, said in the statement. "Today's settlement is significant because it marks the first time the Justice Department has held a lender responsible for failing to monitor its brokers to ensure that borrowers are not charged higher fees because of their race."

In June 2007, AIG Federal Savings Bank settled with the Office of Thrift Supervision allegations that its subsidiaries utilized lax oversight and control of loans outsourced between 2003 and 2006.

"A number of the [Wilmington Finance Inc.] originations resulted in a negative financial impact to certain borrowers due to inadequate consideration of the borrower's creditworthiness or through large broker and/or lender fees," the OTS said at the time.

Thursday's press release indicated that the Justice Department settlement was the result of a referral by the OTS in 2007. While the companies no longer originate through wholesale channels, they agreed to establish anti-discrimination procedures if they ever start doing business with brokers again.

United States of America, Plaintiff, v. AIG Federal Savings Bank and Wilmington Finance Inc., Defendants.
Case No. 1:99-mc-09999, March 4, 2010 (U.S. District Court for the District of Delaware.)

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