A Bakersfield, Calif.-based lender is disputing allegations that it charged Hispanic applicants larger "overages" than whites when pricing mortgage loans, in violation of the Equal Credit Opportunity Act.
The Federal Trade Commission has charged Golden Empire Mortgage Inc. and its owner, Howard Dewey Kootstra, with employing a discretionary pricing policy that resulted in Hispanics paying more for their loans, on average, than non-Hispanic whites.
Golden Empire Mortgage (GEM) is a retail mortgage lender, soliciting applications for loans through employee loan officers and branch managers at about 45 branches, the FTC said. The company does business as GEM Mortgage, with "net branch" affiliates operating under other names.
An attorney representing the company called the FTC’s allegations baseless, and said GEM will dispute them in court.
If the loans in question are compared using annual percentage rate, or APR — the methodology commonly employed by federal regulators — there is no meaningful disparity in GEM’s pricing between Hispanics, non-Hispanics and African Americans seeking similar loan products in similar markets, said attorney Paul Hancock of the law firm K&L Gates.
"We think the FTC is wrong here, and really overreaching the standard accepted analysis," Hancock said.
In focusing on GEM’s overage charges, the Commission is attempting to implement "new methodologies" for analyzing loan pricing that could affect "virtually all lenders in the industry," Hancock said. A better approach, Hancock said, would be to issue guidance for lenders on what he characterized as a new approach by the FTC.
Alice Hrdy, assistant director of the FTC’s division of financial practices, said that the complaint against GEM relied on an analysis of electronic records the lender kept on the overages charged for each loan.
The disparities in overages charged Hispanics and non-Hispanic whites were "substantial, statistically significant, and cannot be explained by factors related to underwriting risk or credit characteristics of the applicants," the FTC said in its complaint.
Hrdy said lenders have long been aware that if they are going to grant employees who originate loans discretion over loan pricing or loan approvals, they must institute monitoring and training to make sure they don’t use those powers in a discriminatory way.
"We don’t see that as some departure, but as a fair lending principal that lenders have been aware of for some time," Hrdy said. …CONTINUED
She noted that the FTC in December settled a case involving similar allegations against Gateway Funding Diversified Mortgage Services LP. The Pennsylvania-based lender was accused of paying loan officers a percentage of overages, and failing to monitor whether African-American and Hispanic consumers paid higher overages than non-Hispanic white borrowers.
The Gateway settlement included a $2.9 million judgment, but all but $200,000 was suspended based on the defendants’ inability to pay.
"We think it’s incumbent on (lenders) to monitor (for discrimination in discretionary pricing) and there’s more than one way to do it," Hrdy said. "There are many companies out there that will help (lenders) figure out what their risks are and how to minimize them."
In its complaint against GEM, the FTC said the price of the company’s mortgages included an interest rate and upfront fees, which were determined in part by the credit characteristics of the applicants and the company’s underwriting risk. The other component of the price was an "overage," set at the discretion of loan officers and branch managers.
As a matter of policy, the overage was supposed to be capped at 3 percent of the applicant’s loan amount. But branch managers or senior management at Golden Empire had the power to grant exceptions — something they did more often when the borrower was Hispanic, the FTC said.
Loan officers kept a portion of whatever overage they charged applicants as compensation, with GEM contracting with each loan officer individually to determine how much of the overage they would keep, the FTC said. In addition, branch managers kept a branch’s net profits, which included overages, as compensation, the FTC said. GEM contracted with each branch manager in determining how it would calculate the branch’s net profits, the complaint said.
Dating back to at least Jan. 1, 2006, the FTC alleges, GEM failed to review or monitor the overages charged Hispanic applicants to see how they compared with those charged non-Hispanic whites.
The complaint, filed in U.S. District Court for the Central District of California, alleges that GEM charged an unspecified number of Hispanic applicants higher prices on average than non-Hispanic whites during 2006.
Hancock, the K&L Gates attorney representing GEM, called discretionary pricing "very common in the industry."
Kootstra, Golden Empire Mortgage Inc.’s sole owner, president and CEO, has been licensed as a California real estate broker since 1987, with no disciplinary actions on his record, according to online records maintained by the California Department of Real Estate.
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