On May 28, 2015, the DOJ and the CFPB filed a complaint and proposed consent order against Provident Funding Associates (Provident) alleging that the mortgage lender violated the Fair Housing Act and ECOA by charging African American and Hispanic borrowers higher broker fees than it charged white borrowers. To resolve these claims, Provident will pay $9 million to approximately 14,000 borrowers who allegedly paid higher interest rates and/or fees for mortgages between 2006–2011. The agencies did not impose a civil money penalty against Provident.
Presumably because of the possibility that the Supreme Court will find that disparate impact cannot be used to establish a Fair Housing Act violation, the complaint alleges that Provident–not the mortgage brokers–charged the broker fees at issue, and that this conduct was “intentional, willful and was implemented with reckless disregard.” The complaint also claims that the alleged victims not only suffered higher direct, economic costs, but also suffered consequential damages, including emotional distress. Although the complaint alleges that Provident was the entity that charged higher broker fees to minority borrowers, both the complaint and the proposed consent order contain contradictory language stating that Provident allowed its brokers to charge those borrowers higher fees. In particular, the complaint and consent order allege that Provident set a par price for its loans based on objective credit and transaction characteristics, and then allowed its brokers to set a higher-than-par interest rate for which they received a yield spread premium (YSP).
In addition to YSPs, Provident also allowed brokers to charge borrowers fees directly. The complaint refers to the combination of YSPs and direct broker fees as “total broker fees,” and alleges that between 2006–2011, Provident charged African-American borrowers 38.6 basis points, and Hispanic borrowers 25.5 basis points, more in total broker fees than it charged white borrowers. The complaint states that Provident capped total broker fees at 3.5% of the loan amount, but otherwise allowed brokers discretion to determine their compensation as long as it was under the cap. Provident changed its broker compensation policy in April 2011, when the Regulation Z loan originator compensation provisions prohibiting YSPs went into effect. This regulatory change reduced, but did not eliminate, the risk of discriminatory disparities resulting from discretionary loan pricing policies.
The complaint alleges that brokers did not have to document their reasons for charging broker fees or setting interest rates that varied from the rate sheets. In addition, the agencies allege that Provident did not meaningfully monitor the total broker fees for fair lending risk or offer or require fair lending training to mortgage brokers. Provident asserts that it has enhanced its compliance management system, including statistical monitoring of broker compensation.
In addition to the $9 million in borrower relief, the proposed consent order requires Provident to implement maintain its non-discretionary broker compensation policies and procedures, enhance its loan processing systems to validate compliance with those policies and procedures, and require its brokers to post a notice of non-discrimination. Provident must also monitor loans for potential disparities in total broker fees, including quarterly and annual portfolio-wide analyses on total broker fees and semi-annual and annual analyses of disparities in select geographic areas as well as at the broker level. Provident must correct any findings, including requiring brokers to explain and correct disparities in total broker fees, and remediating borrowers. The consent order specifically states that the analyses used to evaluate total broker fees cannot include any control factors, unless approved by the CFPB and DOJ. The proposed also order lays out requirements for a fair lending training program.
Although the pricing practices underlying the Provident settlement differ from today’s practices in that mortgage brokers can no longer collect YSPs, the settlement reveals that mortgage loan pricing continues to be a focal point for fair lending enforcement and the DOJ and CFPB expect that, among other matters, wholesale lenders will monitor for broker compensation disparities, both within and across brokers, and correct disparities, including through consumer remediation. For this reason, institutions should consider evaluating the adequacy of their fair lending controls, particularly those associated with discretionary loan pricing.