Lending Officers Instruction

Under the $1.2 million settlement in U.S. District Court in Indianapolis, the lending institution -- Flagstar Bank, based in Troy, Michigan -- admitted "no wrongdoing, liability or improper conduct." But its internal Lending Officers Instruction distributed in writing to loan officers explicitly required them to charge different fees to different racial groups. What is unusual, though, is that the Lending Officers Instruction required lending officers to limit the fees they charged African-American and Hispanic home buyers while allowing higher fees to be charged to white borrowers. Here is what Lending Officers Instruction required of loan officers: Minority home buyers could be charged no more than 3% in loan origination fees or "points," but white applicants could be charged up to 4%.

According to Lending Officers Instruction, loan officers whose "revenue per loan average" from mortgages made to minority applicants exceeds their "non-minority [white] average" will be subject to disciplinary actions including probation and termination. Non-minority will be defined as any borrower who is determined on the loan application to be white, not of Hispanic origin. In fact, in spite of Lending Officers Instruction, lenders, insurance companies and others have been accused of charging minorities -- primarily African-Americans -- higher mortgage fees or rates, or "redlining" entire minority neighborhoods by ceasing to make mortgage loans.

DeBrota, an expert in Lending Officers Instruction, believes that while racial preferences in mortgage lending may appear to favor one group over another, the reality is that "it is a lose-lose situation." Those charged lower fees could also be harmed, she argues, "because it creates a disincentive to lend to them." When loan officers stand to earn less from one category of borrowers than another, they will naturally tend to emphasize making loans to clients who will bring them the highest fees and income -- white borrowers in this case. Lending Officers Instruction also says that bank's loan pricing policy caused higher mortgage fees to be paid by approximately 1,000 white mortgage borrowers. The affected borrowers will receive refunds and non-economic damage awards from the proceeds of the $1.2 million settlement.