AIG Settlement Shifts More Responsibility to Wholesale Lenders: K&L Gates

A recent consent agreement between the Department of Justice (DOJ) and American International Group (AIG) confirms that the Obama Administration believes wholesale lenders should be held responsible for broker fee disparities across groups of borrowers, according to an analysis of the settlement by global law firm K&L Gates. The March 4 consent order requires AIG subsidiaries AIG Federal Savings Bank and Wilmington Finance to pay up to $6.1m in damages to African-American consumers who the DOJ claims paid higher broker fees than similarly situated non-Hispanic white borrowers. AIG also agreed to invest at least $1m in consumer financial education. It’s the first case of mortgage loan price discrimination the DOJ’s brought against a wholesale lender in more than a decade, K&L Gates partner Melanie Brody and associate Rebecca Lobenherz wrote. While AIG no longer operates in the wholesale lending space, the settlement is significant because the case is the first in more than a decade and could be an indication that a new wave of DOJ wholesale cases could be on the horizon. Other similar cases, like a December 2008 settlement between the Federal Trade Commission (FTC) and Gateway Funding, as well as a number of confidential federal banking agency wholesale pricing referrals. “Regardless of the lack of clear legal precedent and the practical challenges associated with managing broker compensation differences, wholesale lenders are officially on notice that the Obama administration will seek to hold them responsible for broker fee differences across borrower groups,” the lawyers said. Brody and Lobenherz said the position that wholesale lenders should be held responsible for broker fee disparities is controversial because no statute, regulation or court has ever expressly articulated the legal standard that applies to a lender’s fair lending responsibility for mortgage broker pricing. “Given the lack of a clear legal imperative, many wholesale lenders may be caught off guard regarding the administration’s view that they are responsible for broker fee differences,” they wrote. Second, under the AIG settlement, a wholesale lender must pay restitution to borrowers for fees that were charged and retained by independent third parties. But some argue the DOJ should pursue the brokers to make such restitution, since it is the brokers who received the compensation at issue. In addition, the lawyers wrote, even lenders that have sought to monitor wholesale price differences across borrower groups have found it difficult or impossible to prevent disparities from occurring. “As a result, some feel that the administration is turning a blind eye to the realities of the marketplace by imposing an impossible compliance standard,” they wrote. “[E]ven though an intervening Supreme Court decision raises a serious question regarding lender liability for broker conduct, the AIG case pushes the ball much further than any previous DOJ action — including the 1996 action against Long Beach Mortgage Company — without addressing the basis for the lender’s liability.” The AIG case began as a 2005 Office of Thrift Supervision (OTS) compliance exam. A December 2007 review of 2005 lending data led the OTS to refer the matter to the DOJ over concerns that AIG had engaged in a pattern or practice of discrimination by “charging black borrowers higher broker fees than similarly situated white borrowers.” The DOJ investigation focused on wholesale mortgages AIG funded between July 2003 and May 2006 and led to allegations that AIG violated the Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA) by allowing third-party mortgage brokers to charge African-American borrowers direct broker fees that were on average 20 bps higher than similarly situated non-Hispanic white borrowers. The DOJ compliant also alleges that in 19 metropolitan areas, black borrowers paid total broker fees ranging from 25 to 75 basis points higher, on average, than white borrowers were charged. Write to Austin Kilgore. The author held no relevant investments.

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