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Bank of America to Pay $335M to Settle Countrywide Case of Alleged Racial Bias

December 21, 2011 at 12:00 AM EDT
Bank of America agreed to pay a $335 million settlement Wednesday over allegations of racial bias in home mortgage lending involving Countrywide Mortgage, which the bank bought in 2008. Jeffrey Brown discusses the investigation and settlement with Illinois Attorney General Lisa Madigan.
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JEFFREY BROWN: The U.S. Justice Department announced a major settlement today over alleged racial bias in home mortgage lending. Bank of America agreed to pay $335 million in a case involving Countrywide Mortgage, which the bank bought in 2008.

Attorney General Eric Holder said Countrywide engaged in systematic discrimination against blacks and Hispanics.

ERIC HOLDER, U.S. attorney general: Now, these allegations represent alarming conduct by one of the largest mortgage lenders in the country during the height of the housing market boom. For example, in 2007, a qualified African-American customer in Los Angeles borrowing $200,000 paid an average of roughly $1,200 more in fees than a similarly qualified white borrower.

JEFFREY BROWN: The settlement stems from an investigation that began in 2008.

Two years later, Illinois Attorney General Lisa Madigan filed her own lawsuit, and she worked with the Department of Justice to gain today’s settlement.

I spoke with her a short time ago.

Lisa Madigan, welcome.

LISA MADIGAN, Illinois attorney general: Thanks.

JEFFREY BROWN: Fill in the picture a bit. What exactly was Countrywide accused of doing? Give me an example from your state.

LISA MADIGAN: Countrywide has been accused of discrimination in lending.

So, if you were an African-American or a Latino borrower, you were likely put into a subprime loan, when you qualified for a prime rate loan, so a lower-rate loan. In addition, even if you were an African-American or a Latino American borrower who was put in a prime loan, you were still charged a higher price for that loan through higher interest rates or higher fees.

So it’s both what we would call steering claims, as well as pricing claims, so discrimination not just in the state of Illinois, but across the country.

JEFFREY BROWN: And when we say — or when Attorney General Holder says systemic, now, what — does that mean that it was company policy? How does something like this happen? Do the higher-ups know what was going on?

LISA MADIGAN: Well, what happens is, they don’t have policies or procedures in place that prevent this from happening.

And so what we found in our investigation, which involved not just a statistical analysis of the loans that they did in Illinois, but it also involved us looking at what were the policies in place when somebody came in, we learned by talking to brokers and various other Countrywide employees that they were given the discretion to be able to, you know, decide what the interest rate was going to be, what the fees were going to be, what the terms were going to be.

And, in fact, there was a company policy that gave Countrywide employees an incentive to put people into higher-interest loans with these toxic features, so, therefore, those loans are more likely to go bad and end up in foreclosure.

JEFFREY BROWN: So, not written down as a rule, clearly, but understood by the brokers?

LISA MADIGAN: Right, because there was no financial incentive for the brokers to actually put somebody into a prime loan if they could put somebody into a subprime loan.

The compensation structure was such that you would make more money if you put people into a poor-quality, higher-priced loan.

JEFFREY BROWN: Now, these were the bubble years. Now we know them as the bubble years.

LISA MADIGAN: Sure.

JEFFREY BROWN: Put this into the larger context of what was happening in the housing market and the role that Countrywide played.

LISA MADIGAN: Well, Countrywide at the time during the height of the housing bubble was the largest lender of every type of mortgage product in the country.

And it really changed from – you know, in one year, they might have been doing 19 percent adjustable-rate mortgages, I believe, in 2003. In 2004, the number was 49 percent. And these adjustable rate mortgages were the real toxic ones. They were – you know, people got in at lower rates, and then they just exploded. And people were never qualified to even start with sometimes the loans when they got them at the lower rate to pay at the higher rate.

But what we found from looking at over 82, 83,000 loans that were originated in Illinois between 2005 and 2007 was that, if you were African-American or Latino, you were three times as likely to be put into a subprime loan than if you were a similarly credit-situated white borrower.

JEFFREY BROWN: Now, Bank of America, which bought Countrywide after this, is not agreeing to, accepting or denying guilt.

LISA MADIGAN: Correct. This is a settlement. And they purchased Countrywide in 2008. And, at this point, they have been in a position to clean up the mess that Countrywide caused to borrowers.

JEFFREY BROWN: A mess in many, many ways for Bank of America.

LISA MADIGAN: Oh, absolutely, absolutely, but, worse, a mess for millions of people across this country who got into terribly toxic loans and ultimately paid more for those loans, not just in terms of the economics of what was the price of your loan, but the impact that that has on their credit, the impact that has on their ability then, you know, to continue to support themselves and their families.

It’s an enormous problem.

JEFFREY BROWN: The amount of the settlement, I understand, dwarfs anything in the past. It goes — some of it goes to — what happens to it?

LISA MADIGAN: All of it is going to go to the borrowers who were the victims of discrimination.

And so people who were priced in a discriminatory manner, people who were steered into subprime loans when they qualified for prime loans, they will get money. It will be handled by an independent administrator.

JEFFREY BROWN: So, they come and try to show their — how they were hurt.

LISA MADIGAN: They don’t even have to do that.

So, Bank of America has the names of the people. They will be providing that information. And then each borrower, there will be a calculation done to determine the economic harm that they faced because of that.

JEFFREY BROWN: I’m curious. You started looking at this in 2008.

LISA MADIGAN: We did.

JEFFREY BROWN: I understand, from the filings today, that the Federal Reserve referred this issue to the Justice Department in 2007. Why did it take so long? What happened then and why does it take so long to get to this stage?

LISA MADIGAN: Well, in 2008, we issued subpoenas to Countrywide. We got information back late in 2008.

It took about a year to do the analysis. It’s a very intensive statistical analysis. We spent a year once we had our information and our evidence of the discrimination negotiating with then Bank of America over these Countrywide claims. And then, once we realized that that wasn’t going to work out, we filed a lawsuit in June of 2010, and ultimately this all got settled.

So, the wheels of justice sometimes spin slowly, but, luckily, they still spin.

JEFFREY BROWN: And speaking of still spinning, I mean, here we are still in a foreclosure crisis.

LISA MADIGAN: Absolutely.

JEFFREY BROWN: Now, this whole issue of predatory lending, I know you’re still looking into it.

LISA MADIGAN: Right.

JEFFREY BROWN: But fit that into the — the issue of predatory lending into what continues with us today.

LISA MADIGAN: Well, the way I look at it is that the fraudulent subprime loans that Countrywide issued and others issued, they’re really at the heart of the collapse of our economy.

And out of Illinois, we went after Countrywide. This is our second lawsuit actually against Countrywide, but there were others. There was Ameriquest. There was Household Finance. And this piece of it really deals with just the discrimination, so the discriminatory aspect of those loans and the impact that they had on African-American and Latino families in Illinois and now throughout the country.

So it’s one piece of a much larger puzzle. There still continue to be claims out there, and they’re being investigated and will ultimately be resolved.

JEFFREY BROWN: And this piece of it, was it shocking to you to see in this day in age that this kind of discrimination would go on?

LISA MADIGAN: Absolutely.

When I heard that, if you were African-American making $100,000, you were still more likely to be put into a subprime loan than if you were white making $35,000 a year, that was absolutely shocking. And I said, we’re issuing subpoenas, we’re going to get to the bottom of this. And we did.

JEFFREY BROWN: Alright, Lisa Madigan is the Illinois state attorney general.

Thank you very much.

LISA MADIGAN: My pleasure. Thank you.