By Doug Miller

Two subsidiaries of American International Group Inc. (AIG), the “ too big to fail” insurer that received one of the biggest slices of the federal financial services bailout, will pay more than $6 million to settle allegations that they discriminated against African Americans by charging them higher fees for mortgages transacted during a period from 2003 to 2006.

According to the Department of Justice (DOJ), which brought the action in U.S. District Court in Delaware under the federal Fair Housing and Equal Credit Opportunity acts, AIG Federal Savings Bank and Wilmington Finance Inc., a mortgage lending company, looked the other way when mortgage brokers charged thousands of black borrowers higher fees than white, non-Latino borrowers. The bank funded mortgages, for which Wilmington Finance provided marketing, sourcing—including identifying and approving mortgage loan brokers—processing, underwriting and closing services.

Thomas E. Perez, assistant attorney general in charge of the DOJ’s Civil Rights Division, said the settlement “marks the first time the Justice Department has held a lender responsible for failing to monitor its brokers to ensure that borrowers are not charged higher fees because of their race.”

It probably won’t be the last time either, he added.

“Discriminatory practices by lenders, brokers and other players in the mortgage market contributed to our nation’s housing crisis and economic meltdown,” Perez said, and “lenders who ignored the discriminatory practices of brokers must be held accountable.”

The mortgage-lending industry has long been rife with practices which discriminated against blacks and other people of color seeking to become homeowners. These have included: refusing to lend to those who wanted to buy in certain, predominantly-white neighborhoods; refusing to extend black applicants credit despite their good credit histories; charging them unwarranted higher fees; and forcing them to take on subprime mortgages (mortgages with more expensive repayment terms issued to buyers who don’t meet the standard financial criteria for home loans). The latter practice was a significant factor in the recent collapse of the housing market that has sharply reduced the number of black homeowners and devastated black neighborhoods across the country in recent years.

A formal complaint filed by the DOJ states that, from July 2003 to May 2006, African-American borrowers in the market for residential mortgages paid total broker fees ranging from 25 to 75 basis points higher, on average, than total broker fees paid by white borrowers. One basis point equals one hundredth of one percent, so 25 basis points would total one quarter of one percent. The discriminatory pricing purportedly occurred in more than a dozen cities across the nation, including New York, Atlanta, Baltimore, Birmingham, Philadelphia, Orlando, Tampa, Chicago, Detroit, Cleveland, Hartford, St. Louis, Kansas City, Portland, OR, Phoenix and Las Vegas.

A warning shot

Under terms of the settlement, AIG Federal Savings Bank of Wilmington, DE, and Wilmington Finance Inc. of Plymouth Meeting, PA, will pay up to $6.1 million to African-American customers who were charged higher broker fees, and will invest an additional $1 million in finance education programs for consumers.

Robb Adkins, executive director of the Obama Administration’s Financial Fraud Enforcement Task Force (FFETF), said the settlement “should serve as a warning shot to potential fraudsters and those who would discriminate against borrowers. We are redoubling our fight, and we are using all our resources to combat these crimes.”

The FFETF, which investigates and prosecutes financial crimes and other abuses in the financial markets, is made up of representatives from a broad array of federal agencies, regulatory authorities, inspectors general and state and local law enforcement authorities.

AIG Federal Savings Bank and Wilmington Finance Inc. currently are not engaged in lending wholesale home mortgages.

Doug Miller is a writer living in Westchester County, New York.