Posted on 05 Mar 2010
The Justice Department announced a $6.1 million settlement Thursday with two subsidiaries of American International Group Inc. after allegations that they discriminated against African-American mortgage borrowers.
The department said about 2,500 African-American borrowers were victims, and would each receive about $2,300 in compensation.
Civil-rights and consumer groups have long alleged that during the recent housing boom some banks channeled ethnic minorities into higher-cost subprime loans, a type of loan intended for borrowers with poor credit or minimal income documentation; whites in similar circumstances received lower-cost loans, the groups alleged.
Justice Department officials said more such cases were in the pipeline. U.S. Assistant Attorney General Thomas E. Perez, head of the department's civil-rights division, said that for a long time, lenders' supervision over their mortgage brokers was inadequate.
AIG spokesman Mark Herr said the company and its subsidiaries disagreed with the government's allegations but were pleased to reach the settlement and "avoid the distractions and burdens of protracted litigation over contentious issues."
"Neither AIG FSB nor Wilmington Finance countenance or condone discriminatory conduct," he said, referring to the two subsidiaries, AIG Federal Savings Bank and Wilmington Finance Inc., a mortgage-lending affiliate.
The Justice Department heralded the action as an outgrowth of the Financial Fraud Enforcement Task Force, which President Barack Obama appointed to scrutinize practices that led to the financial crisis.
The Federal Reserve years ago drew attention to data indicating that minorities received the vast majority of subprime loans. The Fed referred some of the banks to the Justice Department for investigation, officials said.
Mike Calhoun, president of the Center for Responsible Lending, a consumer-advocacy group, said that according to government data from 2002 to 2007, half of African-American home mortgages were subprime, compared with about 20% for whites.
"Our research indicated widespread discrimination in the banking industry, and in particular that mortgage brokers and lenders were paid higher fees to put people in higher cost loans than they could qualify for," he said.
The American Bankers Association in the past said the data didn't provide a complete picture of banking practices. An ABA official Thursday said he wasn't familiar with the AIG case and couldn't comment.
In the AIG case, the Justice Department alleged that African-American borrowers nationwide were charged higher fees on wholesale loans made by the two subsidiaries.
Prosecutors don't allege that the parent company knew of the activities. The AIG subsidiaries failed to supervise the practices of their independent mortgage brokers, a lack of oversight that cleared the way for the brokers to discriminate in setting fees, the department alleged.
The loans were issued from July 2003 to May 2006 to borrowers in 19 metropolitan areas, the department said. In some cases, the borrowers weren't aware that they were victims, officials said.
AIG FSB and Wilmington Finance stopped wholesale home-mortgage lending operations in 2006 and 2008, respectively.
In addition to paying $6.1 million to victims, the department said, AIG and the subsidiaries will spend at least $1 million on financial education for consumers.