DOJ and Lending Discrimination: $960,000 Fund Settles Shawmut Mortgage Case

The Shawmut Mortgage Company agreed in December to create an initial $960,000 fund to compensate individual Blacks and Hispanics who were unfairly denied home mortgage loans.

The settlement followed a one-year investigation by the Justice Department and the Federal Trade Commission into alleged discriminatory lending practices, by the Connecticut based company.

First Denial Under HMDA or Equal Credit Act

In November 1993, the Federal Reserve Board denied a request from Shawmut to approve their acquisition of New Dartmouth Bank in Manchester, NH. This was the first time the Federal Reserve Board had denied an acquisition under the Housing Mortgage Disclosure Act or the Equal Credit Opportunity Act. Three of seven Board members voted for approval. Three Federal Reserve Board governors who voted against approval cited inaccuracies in the HMDA date reported by Shawmut for 1990 through the first half of 1993.

The Federal Reserve Board had referred the case to the Justice Department in December 1992 following a study and report by the Federal Reserve Bank of Boston, which showed that race was a factor in some of the disparity in approval rates for loans between minorities and whites in Boston.

In establishing a format for handling instances of mortgage lending discrimination, Attorney General Janet Reno said that the Justice Department agreed to settle the case because Shawmut had initiated efforts to ensure that minority and white applicants are treated equally. Those efforts, which include evaluating and changing its underwriting process, were implemented prior to the joint investigation into the company's practices.

Ms. Reno stated that, "Because this institution took corrective actions that have reduced the racial gap in its denial rates, the Department believes compensatory relief is the appropriate remedy in this case. This should alert other lenders that if they closely examine their lending practices and make necessary changes to eliminate discrimination, they will fare better in this Department's stepped-up enforcement effort than those who do not."

Black Rejection Rate Double in HMDA Data

Shawmut began to reform its practices in 1991 after data made available under the Home Mortgage Disclosure Act revealed that black and Hispanic applicants were being rejected by Shawmut and other banks across the country at twice the rate of whites.

A 1992 Federal Reserve Board study of Boston area banks, including Shawmut, showed discrepancies that could not be explained by differences in qualifications alone. Thereafter, Shawmut reevaluated its remedial practices and instituted additional procedures that have substantially reduced its minority rejection rates.

Victims to get $10,000 to $15,000

Under the consent decree filed together with a complaint in U.S. District Court in Hartford, Connecticut, Shawmut will be required to compensate applicants rejected on the basis of race in the amount of at least $10,000, and not more than $15,000 each. Shawmut will replenish the compensation fund if needed. Also, Shawmut has agreed to continue its fair lending compliance program to ensure that Black and Hispanic borrowers are treated in a nondiscriminatory fashion. Elements of the program include the following:

  • Training loan officers in principles of fair processing and fair underwriting
  • Changing the compensation of loan originators to encourage them to try to make the loan type fit the applicant's needs
  • Conducting random testing to ensure employees are not discouraging minorities from applying for loans
  • Extending its advertising and marketing to reach into predominantly minority communities
  • Opening a branch in the predominantly minority community of Roxbury, Massachusetts
  • Expanding the role of its Mortgage Review Committee to include reviewing all rejected minority applications as well as all other rejected applications of individuals whose incomes are 115% or less of the median for their metropolitan areas

U.S. v. Shawmut Mortgage Co, No. 3:93 CV-2453 (AVC) (D. Conn. 12-13093)