Provident Charged with Discrimination on Loans from 2006 to 2011

Provident Funding Associates has been charged by two federalrnagencies with charging higher broker fees to minority borrowers.  The ConsumerrnFinancial Protection Bureau (CFPB) and the Department of Justice (DOJ) filed thernjoint complaint asking the court to require the California lender to pay $9rnmillion in damages to African American and Hispanic borrowers the agencies sayrnwere harmed. </p

Provident originates mortgage loansrnthrough a nationwide network of brokers. Last week’s complaint alleges that betweenrn2006 and 2011, Provident, which made over 450,000 mortgage loans during thernperiod, set base or par rates for its various loan products reflecting therncompany’s assessment of individual applicant creditworthiness, current interestrnrates, and what investors were willing to pay for the loans.  These rates were published on sheets providedrnto brokers who were also given schedules of yield spread premiums (YSP) Providentrnwould pay brokers who originated higher priced loans.  The fees paid to Provident’s brokers werernthus made up of two components: payments by Provident from increased interestrnrevenue and from the direct fees paid by the borrower.</p

Creditors are prohibited by the EqualrnCredit Opportunity Act from discriminating against applicants in creditrntransactions on the basis of characteristics such as race and national origin.rnIn the complaint, the CFPB and DOJ allege that Provident violated the act by chargingrnAfrican-American and Hispanic borrowers more in total broker fees than whiternborrowers based on their race and national origin and not based on their creditrnrisk. The agencies allege that these discretionary broker compensation policiesrncaused the differences in total broker fees, and that Provident unlawfullyrndiscriminated against African-American and Hispanic borrowers in mortgagernpricing. Approximately 14,000 African-American and Hispanic borrowers paidrnhigher total broker fees because of this discrimination. </p

The DOJ also alleges that Providentrnviolated the Fair Housing Act, which also prohibits discrimination inrnresidential mortgage lending. </p

In addition to the $9 million inrndamages the consent order also requires Provident to pay for the services of arnsettlement administrator to distribute the funds and to hold in place itsrncurrent policy (Provident said it changed its broker compensation policyrnin response to regulatory developments in 2010 and 2011) which does not allow discretion inrnborrower- or lender-paid broker compensation because individual brokers arernunable to charge or collect different amounts of fees from different borrowersrnon a loan-by-loan basis. The consent order also requires that Providentrncontinue to have in place a fair lending training program and broker monitoringrnprogram.</p

According to Richard Andreano, Jr., writing in Ballard and Spahr’s CFPBrnblog, the consent order requires brokers to disclose to applicants (a) thernfull amount of broker compensation, stated separately for lender-paid orrnborrower-paid fees, and whether or not that compensation is negotiable, and (b)rna specified notice of non-discrimination. </p

Andreano also says, “The consent order indicates that under Provident’srncurrent broker compensation policy, brokers cannot charge different amounts ofrnfees to borrowers on a loan-by-loan basis because each broker (a) mustrnperiodically select its compensation level as a percentage of loan amount, uprnto a maximum percentage or dollar amount, (2) must charge the percentage orrndollar amount it has selected to each loan application it submits to Providentrnduring the applicable period, and (c) may not charge any other fee inrnconnection with originating a Provident loan.”</p

The consent order requires approval ofrnthe court and the two agencies filed that order with the United States DistrictrnCourt for the Northern District of California. The complaint is not a findingrnor ruling that the defendants have actually violated the law. On December 6,rn2012, the CFPB and the DOJ signed an agreement that has facilitated strongrncoordination between the two agencies on fair lending enforcement, includingrnthe pursuit of joint investigations such as this one. </p

CFPB Director Richard Cordray said, “Consumersrnshould never be charged higher fees because of their race or national origin.  We will continue to root out illegal andrndiscriminatory lending practices in the marketplace. I look forward to workingrnclosely with our partners at the Department of Justice to ensure consumers arerntreated fairly.”</p

“The Civil Rights Division is committedrnto ensuring that all types of lending institutions, including wholesalernmortgage lenders, comply with the fair lending laws,” said Principal DeputyrnAssistant Attorney General Vanita Gupta of the Justice Department’s CivilrnRights Division. “We look forward to further collaboration with the Bureau inrnprotecting consumers from illegal and discriminatory lending practices.”

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