Delta Funding Corporation, a consumer finance company headquartered in Woodbury, New York, today agreed to settle charges brought by the Federal Trade Commission, the Department of Justice, and the Secretary of the Department of Housing and Urban Development (HUD). The lawsuit, filed today in federal court together with a proposed settlement, alleges that Delta -- a national subprime mortgage lender -- violated consumer protection and fair lending laws by approving and funding loans without regard to the borrower's ability to repay; approving and funding home mortgage loans to African American females with higher mortgage broker fees than similarly situated white males; and paying kickbacks and unearned fees to brokers to induce them to refer loan applicants to Delta. According to the federal agencies, Delta's actions have burdened borrowers with thousands of dollars of debt and exposed them to unwarranted risk of default or foreclosure. This is the first suit brought by the federal government that combines allegations of consumer protection and fair lending violations by the same lender.
According to the FTC, Delta engaged in a pattern or practice of asset-based lending, in violation of the Home Ownership and Equity Protection Act of 1994 ("HOEPA"). Specifically, Delta extended loans to borrowers based on the borrower's collateral rather than considering the borrower's current and expected income, current obligations, and employment status to determine whether the borrower is able to make the scheduled payments to repay the obligation. In these instances, prudent underwriting criteria, such as debt-to-income ratios, residual income, and repayment history, would have indicated that the borrower likely would have difficulty repaying the loan. Delta's practice of approving loans without regard to borrowers' ability to repay exposed borrowers to unwarranted risk of default and foreclosure. In addition, the complaint alleges that Delta's high-cost loans also contain prepayment penalty provisions, and a prohibited "increased interest rate after default" provision, in violation of HOEPA.
"Delta targeted these low income homeowners for high monthly payments, turning the American dream of home ownership into a nightmare," said Jodie Bernstein, Director of the FTC's Bureau of Consumer Protection. "That's a dangerous policy for borrowers because it could lead to the loss of thousands of dollars and even their home."
Bernstein noted that the FTC's action against Delta is part of the Commission's ongoing enforcement effort to curb abusive practices in the subprime mortgage lending industry. In 1998, the FTC filed suit against Capital City Mortgage Corporation, a Washington, D.C.-area mortgage lender, and in July 1999, as part of "Operation Home Inequity," settled allegations against seven subprime mortgage lenders across the country.
Loretta Lynch, U.S. Attorney for the Eastern District of New York stated, "Home ownership is an integral part of the American Dream. Lending decisions should be based on the qualifications of the borrower and not in any way on race or gender."
"Today's suit sends a clear message that the United States government will not tolerate discriminatory or illegal lending practices," said DOJ's Acting Assistant Attorney General for Civil Rights Bill Lann Lee. "Federal enforcement agencies are committed to working side by side to fight lending discrimination and consumer fraud across the nation. Residents of minority neighborhoods should no longer be denied the opportunity to obtain credit on fair terms at fair prices."
The Department of Justice and the United States Attorney for the Eastern District of New York focused their investigation on Delta's loans in Brooklyn and Queens where the company makes about a quarter of its annual total of loans, primarily concentrated in minority neighborhoods. The complaint alleges that from January 1996 though December 1999, Delta violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) by intentionally charging African American females higher loan prices than similarly situated white
males. The complaint alleges that Delta underwrote and funded home mortgages -- mostly refinancing loans -- for which the broker fees were substantially higher for African American
females than for similarly situated white males. The complaint charges that Delta offered a variety of inducements to brokers to do business with Delta. These inducements seldom benefit consumers, but resulted in higher fees and points to Delta, the complaint alleges.
The complaint also includes claims brought on behalf of the Secretary of HUD alleging that Delta knew that the fees charged by its brokers did not bear a reasonable relation to the services provided by the broker. The complaint alleges that Delta aided its brokers in obtaining unearned fees by performing many of the services for them in violation of the Real Estate Settlement Procedures Act (RESPA).
"The dream of homeownership should not be encumbered by unfair and excessive mortgage loan costs, said Secretary of Housing and Urban Development Andrew Cuomo. "Lenders and mortgage brokers are put on notice by this settlement agreement that HUD and the Federal government are prepared to fight for borrowers who are being victimized by predatory mortgage lending practices."
Under the terms of the proposed settlement, Delta would be prohibited from engaging in any lending practice that discriminates on the basis of sex, race, or color in the pricing of mortgage loans as prohibited by the FHA and ECOA or that violates RESPA or HOEPA.
Consumers harmed by Delta's fair lending, RESPA and HOEPA violations may be eligible to receive compensation from funds provided in an agreement Delta entered into with the New York State Banking Department's (NYSBD) Remediation Agreement of September 17, 1999, which resolved the NYSBD's fair lending and consumer protection allegations. The agreement includes a $7,250,000 "Remediation Fund" and an "Amelioration Fund" valued at approximately $5 million. The funds shall be used to compensate borrowers identified by NYSBD and the federal agencies.
Delta also has agreed to compliance policies and procedures concerning its business dealings with mortgage brokers, including:
- rejecting a broker's proposal when Delta believes a broker's proposal is not permitted under fair lending law;
- only funding loans where the company reasonably believes the broker compensation is made for services actually performed;
- providing each borrower with a Broker Information Disclosure form; and
- maintaining loan underwriting standards to ensure that loans are based on the borrower's ability to pay.
The agreement is subject to approval by the U.S. District Court. The Commission vote to file the complaint and proposed settlement was 5-0.
The FTC has available a number of brochures to advise consumers as they shop for a home loan: "Home Equity Scams: Borrowers Beware!" and a Consumer Alert: "Need a Loan? Think Twice About Using Your Home as Collateral." Copies may be obtained from the address below.
Copies of the complaint and settlement, the consumer brochures, and information regarding previous FTC enforcement actions, are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; toll-free: 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
(FTC Matter No.: 992 3290)
(Civil Action No. Not Available at Press Time)
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