The New York Times reports faithfully that the Department of Justice has entered into the biggest fair lending settlement on record with Bank of America on charges that Countrywide had charged more 200,000 Hispanic and black borrowers higher rates and fees than white borrowers with similar credit records. It also engaged in discrimination by marital status.
Impressive, no? If you do the math, $335 million divided by 200,000 is $1675 per borrower, and the settlement agreement indicates that the amount borrowers will receive will average $1600. While obeying the usual “no one admits to anything” forms, the settlement has language that indicates that borrowers were overcharged in the range of several hundred dollars to several thousand dollars. So at a superficial level, one might conclude the settlement amount is roughly in line with the damages suffered by borrowers.
But is it? First, we don’t know the distribution of the alleged damages. And there is a net present value issue. These abuses were first noticed by the Fed in 2006 (and since, as we wrote in 2007, the Fed was even more lax than the OCC in enforcing subprime-related legislation, one can assume the conduct was flagrant) and referred to the DoJ, and the Office of Thrift Supervision made a similar referral in 2008. So the conduct started before 2006 and continued to the end of the subprime market. Countrywide has thus has the use of its presumably ill gotten money all these years. And if this settlement is philosophically a disgorgement, that suggests that a fine is also in order. And there are other cute features, such as the settlement is to be administered by someone hired and paid for by Bank of America.
More important, given the number of people involved, one has to think that there are some cases where the difference between the cost of the loan these borrowers got and the cheaper ones they qualified for could have made the difference between a borrower making it versus going into delinquency. So for any cases where the overcharges tipped a stressed borrower into a foreclosure, the settlement is clearly inadequate.
This is how the DoJ sees the situation:
“Chances are, the victims had no idea they were being victimized,” said Thomas E. Perez, the Justice Department’s assistant attorney general for civil rights. “It was discrimination with a smile.”
That isn’t the way lawyers on the ground see it. For instance, I received this e-mail from attorney Michael Olenick, and I’ve heard similar accounts over the years:
The second most common story I hear from homeowners — after being told to stop paying — is they were bait-and-switched to sub-prime loans. It happened to me. When people showed up to a closing there was a sub-prime loan when they’d asked for, qualified for, and agreed to a standard loan. But then they were told “you can walk away but then you’ll be in breach to the seller since we are offering you a loan, and then the seller will then sue you and you’ll ruin their own closing .. but don’t worry because you can always refi it into a prime loan.”
They’re paying a token fine for discrimination when, for once, on this issue, they probably weren’t discriminating at all: they were equal opportunity fraudsters.
So we have the appearance of justice being done, when much bigger crimes go uninvestigated and unpunished.