As a $1.2 million settlement of a federal class action suit suggests, discrimination in mortgage lending doesn't only hurt minority home buyers.

White borrowers can also be targeted -- and charged higher fees behind their backs.

Flagstar Bank, a large Michigan-based lender that funds home loans nationwide, admitted no wrongdoing as part of its settlement approved by a federal court late in December. But documents filed with the U.S. District Court in Indianapolis included formal, written pricing instructions distributed by Flagstar to its loan officers that required that white borrowers be charged higher maximum fees than non-white, minority borrowers.

The instructions forced loan officers to cap the fees charged to minority applicants at three percent. White borrowers could be charged up to four percent in fees. Loan officers whose average revenue-per-loan from minority applicants exceeded their average revenue-per-loan from white borrowers could be disciplined, put on probation, or fired.

Under the pricing guidelines, loan officers were required to determine each borrower's race from the standard Form 1003 mortgage application sheet. The policy statement defined "non-minority" applicants as "white, not of Hispanic origin."

The settlement, signed by U.S. District Court Magistrate Judge Tim Baker, requires Flagstar to refund overcharges to approximately 1,000 loan applicants negatively affected by the policy -- an estimated $704,000 plus interest. The company also agreed to pay approximately $160,000 in "non-economic damages" and $300,000 in legal fees. The lead plaintiff in the case will receive $10,000.

A Flagstar spokeswoman told Realty Times that the company has a policy of never commenting on litigation. But the lawyer for the plaintiffs, Amy Ficklin DeBrota, said the settlement shows that racial discrimination in home mortgage lending "can take forms that you might not suspect."

In this particular case, according to DeBrota, the differential pricing policy was only discovered and documented when one of Flagstar's loan officers refused to abide by it. The loan office ultimately was fired and turned to DeBrota, an employment law and fair housing expert in Indianapolis, for legal help.

DeBrota said she has never handled a reverse discrimination fair lending case filed by whites before, but believes it could happen elsewhere. Though the company would not confirm or comment on it, DeBrota said the policy on fees was distributed to loan officers after auditors from the federal Office of Thrift Supervision detected a possible pattern of higher fees on minority loans in Flagstar's portfolio records.

To ensure that such a pattern did not occur on new loans, she said, the bank put forth a policy that essentially mandated the reverse: lower average fees for African-American and Hispanic home buyers, and higher average fees for white home buyers.

Either way, though, she said, the policy violated the Fair Housing Act of 1968, which bans any consideration of race, religion, sex, marital status or age in mortgage lending. DeBrota added that although on its face, the Flagstar policy appears to have benefited minority home buyers at the expense of white home buyers, the opposite effect could have occurred as well: Some loan officers, seeking to maximize their own commission revenue, might have sought to fund more white applicants than minorities.

Published: January 5, 2004

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.