A California lender, Luther Burbank Savings, was alleged to have engaged in discriminatory practices by establishing a $400,000 minimum on single-family residential loans. The impact of that policy was to provide too few loans to African-Americans and Latinos, according to prosecutors.
The bank agreed to a $2 million settlement this week. It also pledged not to reinstate the minimum loan amount, which has not been in effect since 2011.
Andrew Sandler, a lawyer who represented Luther Burbank, said Friday at a National Mortgage News/American Banker Regulatory Symposium that the bank was only offering single-family loans because regulators required it to diversify from its multifamily lending business, which served minority communities.
He argued that the government is overreaching—in effect, forcing banks to develop new loan products to avoid charges that their existing products have a disparate negative impact on minorities. Luther Burbank's single-family loans were nontraditional mortgages—including negatively amortized and interest-only loans—that were intended for wealthy borrowers.
"Taking and using the disparate impact theory in this very aggressive and, I would submit, inappropriate way goes too far," Sandler, the chairman and executive partner of BuckleySandler LLP, said during a panel discussion of fair-lending cases.
But Steven Rosenbaum, chief of housing and civil enforcement at the Justice Department, responded that the risks in the California bank's business model should have been apparent, as a result of long-standing federal policies.
Referring to the California bank's $400,000 minimum loan, he said, "You are sending a message to the community that you are interested in serving one part of the community, but not the whole community."
Luther Burbank Savings said publicly last week that it settled the case to avoid the legal costs of fighting the Justice Department.
Sandler and Rosenbaum agreed that the U.S. Supreme Court is likely to clarify a key question in the fair-lending realm relatively soon.
The issue is whether prosecutors will be able to continue arguing that lending practices are discriminatory, even if they are not intentionally so, as long as they have a disparate impact on minority borrowers.
Though the two lawyers are often on opposite sides of the table, they found common ground in urging lenders not to assume the Supreme Court will eventually side with banks.
"You can comply with the law as it is today, and it has been for the last 18 years, or you can ignore that," Rosenbaum said.