An aggressive push by the Justice Department to investigate fair lending claims is prompting a backlash from bankers who claim the government is abusing its authority and contradicting findings by other federal regulators.
In part as a reaction to the financial crisis, the Obama administration has targeted banks for alleged redlining and other fair lending violations to an extent not seen since the Clinton administration.
But critics charge the effort has gone too far, claiming Justice has misused legal interpretations to bring complaints to court, alleged redlining in areas outside a bank's market area and encouraged loans to unqualified borrowers as part of expensive settlements. They also said the government is too focused on community banks instead of Wall Street firms.
"'Witch hunt' is too mild a term to use for what the Department of Justice is doing to basically community banks. I would call it extortion," said Camden Fine, the president and chief executive officer of the Independent Community Bankers of America. "It's an abuse of governmental power over smaller banks that are basically too small to fight back."
But others counter that the banking industry is overreacting. They said the emphasis on fair-lending issues during a Democratic administration is not surprising — few cases were tried during the Bush administration — especially given the recent financial crisis.
John Taylor, president and chief executive of the National Community Reinvestment Coalition, said some bank claims are overblown. For example, he disputed the notion that the Justice Department is extracting settlements that push banks to underwrite loans that are highly risky.
The government "would never agree that … lenders make loans to people who cannot afford to pay them back," Taylor said.
At issue is the launch last year of a special fair-lending unit within Justice's civil rights division, tasked with enforcing laws such as the Fair Housing Act and Equal Credit Opportunity Act and investigating claims of bank discrimination in their credit policies.
Typically, such claims originate when a bank's primary regulator refers suspicious practices to Justice. The department has said such referrals ballooned following the crisis. The civil-rights division received 49 last year, which was more than in the prior 20 years combined.
In remarks last year about the new unit, Assistant Attorney General Thomas Perez, who leads the civil rights division, suggested the department's fair-lending authority had been underused in the prior administration.
"As part of the administration's efforts, the division is dusting off the Fair Housing Act and the Equal Credit Opportunity Act, using them to combat those forms of discrimination that serve to keep our nation and our communities divided," Perez said.
Justice investigations launched in 2009 and 2010 to look into alleged fair-lending violations are only recently starting to bear results. Between 60 and 70 enforcement proceedings are said to be in the pipeline, and some banks have already settled. Alleged offenses run the gamut, experts said, from minority borrowers facing higher costs or fewer credit options than white borrowers, to their being steered into unaffordable loans.
