Perez Framed Lenders As Racist In $600 Mil Shakedown

Posted 05/20/2013

Labor Secretary Thomas Perez testifies at his confirmation hearing on Capitol Hill on April 18, 2013. AP

New evidence has emerged that Assistant Attorney General Thomas Perez may have improperly prosecuted Wells Fargo, Bank of America and dozens of other banks for lending discrimination by using deficient mortgage data in investigations.
IBD has learned the special prosecutor spearheading Perez's record number of statistics-based cases of racism against lenders told federal bank regulators in 2010 he lacked key home loan data needed to conduct the kind of iron-clad "regression analyses" that would hold up in court.

Still, Perez's civil-rights division used the shaky data to force bank defendants into a record $600 million in settlements, including loan set-asides and cash payouts for minority borrowers.

Perez faces increased scrutiny as President Obama's nominee for secretary of labor.

In a confirmation hearing last week, some senators questioned his role in scuttling a Supreme Court case that would have challenged his use of "disparate impact" liability a questionable civil-rights theory with a low standard of proof to prosecute home lenders for racial bias.

Republicans hint they may delay or block a full Senate confirmation vote.

In addition to targeting mortgage giants BofA, Wells and SunTrust Bank, Perez also has gone after small banks.
In March, for example, Perez signed orders forcing Community State Bank of Michigan and Texas Champion Bank to compensate African-American and Latino borrowers.

Though defendants settled charges, they've denied guilt. They say they cut deals to avoid protracted legal battles with Washington and damage to their corporate brands.

Also, some Washington bank lawyers tell IBD their clients were coerced into settling under federal threat of blocked mergers and acquisitions. Regulators placed holds on expansion plans while they remained under investigation.

Perez's top prosecutor is Eric Halperin, the Justice Department's first "special counsel for fair lending" and a former affordable-housing activist.

In a largely unnoticed September 2010 appearance before the Federal Reserve Board of Governors, Halperin acknowledged the mortgage data "screens" he uses to show racial disparities in lending lack information about the creditworthiness of minority borrowers.

Halperin said his screens were based on Home Mortgage Disclosure Act data, which don't include information about a borrower's credit score, loan-to-value ratio, debt-to-income ratio or down payment all key risk factors lenders use to approve and price loans.

"While we have devised screens that use HMDA data to identify potentially problematic lenders, there are occasions where the (racial) disparities in HMDA can be explained by legitimate non-discriminatory reasons," Halperin allowed.
Only, such reasons haven't been considered.

HMDA has served as the start and end point of analysis. Cases brought against banks have been based on the incomplete HMDA data, unsupplemented by individual loan files, which means prosecutors drew their conclusions prematurely.

"It used to be that when the government would accuse a lender of discrimination, they'd look at loan files to determine whether there's a real problem," longtime Washington bank lawyer Andrew Sandler told IBD. "Now they're taking a shortcut and relying exclusively on statistics to make cases."

"The problem with that is statistics mask other things going on, such as decisions based on risk," Sandler explained. "And every borrower or (racial) group doesn't have the same risk. So if you fail to really focus on 'similarly situated' borrowers, you don't get a true picture; and allegations of discrimination really don't have credibility."

Wells Fargo, for one, asserted in court documents that its loan files would show no evidence of racial discrimination if prosecutors had conducted "an appropriate analysis" of them.

To hold up in court, disparate impact must consider all relevant facts and circumstances, including business justification. Perez and his lead prosecutor never met this test, bankers argue.

Halperin's previously unreported statements before the Fed support the bank industry's claim that Perez has conducted a massive "witch hunt" and "shakedown."

As part of settlement deals, Perez has required bank defendants to sign "nondisclosure agreements" barring them from talking about the methods used to allege discrimination.

Bank lawyers say Perez's team is trying to hide the weak evidentiary grounds on which cases are built.

"It's horrible what they're doing. They don't have any proof," said Reginald Brown, a partner at Wilmer Hale in Washington.

Before he was gagged, one Virginia banker under investigation told IBD the screens leave out variables such as debt-to-income ratio when comparing mortgage data by race. He said government prosecutors have not been honest in their complaints claiming minority borrowers who paid higher prices for loans were "similarly situated" with white borrowers in the financial risk they posed.

In defending the screens, Perez recently cited a years-old study published by the liberal Center for Responsible Lending Halperin's previous employer which compared "similarly situated" homebuyers by race. He noted it found the same kinds of disparities in loan pricing.

However, the 2006 study was widely criticized for failing to adjust data to account for debt-to-income ratios and other reliable risk factors lenders used to price loans.

A more comprehensive Fed study at the time found no racial bias in loan pricing after controlling for all credit-risk factors.
In court documents, Perez has argued he doesn't have to prove lenders intended to discriminate against minority borrowers. Nor does he have to weigh all business factors that went into lending decisions.

Under "disparate impact" liability, he argues he only has to show statistical differences in outcomes by race.
Last year, the Supreme Court was poised to strike down this dubious legal rationale for civil-rights enforcement. But Perez and Halperin teamed up to kill the relevant housing case before the high bench.

The two Justice officials even traveled to St. Paul, Minn., to meet with the petitioner to strong-arm him into dropping his challenge.

Congress continues to probe the unusual interference for ethics violations.

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