IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA,
Plaintiff,
v.
CASE No. CV 00 1872
DELTA FUNDING CORPORATION, and
DELTA FINANCIAL CORPORATION
Defendants.
___________________________________
SETTLEMENT AGREEMENT AND ORDER
The United States of America, through the United States Department of Justice and on
behalf of the Secretary of Housing and Urban Development and the Federal Trade Commission,
and Delta Funding Corporation ("Delta Funding") and Delta Financial Corporation (except where
otherwise noted, both defendants are collectively referred to as "Delta" or "the lender") have
agreed to enter into this Settlement Agreement simultaneously with the filing of the United
States of America's Complaint (the "Complaint") alleging that Delta has violated the Fair
Housing Act (42 U.S.C. §§ 3601-3619)("FHA"), the Equal Credit Opportunity Act (15 U.S.C. §§
1691-1691f) and its implementing Regulation B (12 C.F.R. Part 202) (collectively, "ECOA"), the
Home Ownership and Equity Protection Act of 1994 (15 U.S.C. § 1639) and its implementing
Regulation Z (12 C.F.R. §§ 226.31 - 226.32) (collectively, "HOEPA"), and the Real Estate
Settlement Procedures Act of 1974 (12 U.S.C. § 2601 - 2617) and its implementing Regulation X
(24 C.F.R. Part 3500) (collectively, "RESPA"), all as amended. This Settlement Agreement
resolves fully all claims in the United States' Complaint.
- INTRODUCTION
This case is brought by the United States to vindicate the rights of persons whom the
United States claims were injured by alleged violations of the fair lending, fair housing and
consumer protection laws and regulations, as set forth above. The Complaint alleges that Delta
is engaged in the business of making subprime home mortgage loans; that a large part of its
business is concentrated in the minority residential areas of Kings and Queens Counties, New
York; that the majority of its loans are refinancing loans for the purpose of debt consolidation;
that the majority of its borrowers in these counties are presented to Delta by mortgage brokers;
that brokers submitting loans to Delta charge up to 10% of the loan amount as a "broker fee,"
unless state law provides for a lower amount; and that, during the period January 1996 through
December 1998, approximately 17.5 percent of Delta's loans in Kings and Queens Counties,
New York were high fee loans covered by HOEPA.
The United States alleges that Delta violated ECOA and FHA by approving and funding
loans with disparate broker fees that resulted in African American female borrowers being
charged more on average than white male borrowers were charged and that the higher prices
charged to African American females were not based on differences in risk of repayment. The
United States does not claim that Delta discriminated in charging borrowers disparate fees that
were set by Delta, but rather in acceding to the discretionary prices that were charged by
mortgage brokers for the loans made by Delta.
The United States alleges that Delta violated RESPA because it contends that in certain
cases the fees received by mortgage brokers were not for services actually performed or were
higher than an amount reasonably related to the value of goods and facilities provided and
services performed, and, as such, constituted illegal payments for the referral of mortgage loan
business or unearned fees.
The United States alleges that Delta Funding violated HOEPA because it contends that
Delta made certain loans based on borrowers' equity in their homes rather than the borrowers'
ability to repay the obligation, and included prohibited prepayment and increased interest rate
default provisions in certain HOEPA loan documents.
The allegations of the Complaint concern the period January 1996 through December
1998, during which Delta made more than 5,000 home mortgage loans to borrowers in Kings and
Queens Counties, New York. Delta conducts its home mortgage lending business in more than
20 states other than New York, but almost half of its lending is in that state.
Delta denies all allegations in the United States' Complaint and that any of its actions
have constituted violations of the ECOA, FHA, RESPA, HOEPA or any other fair housing, fair
lending or consumer protection law. In particular, Delta disputes the validity of the statistical
analyses the United States relied upon as the principal basis for its ECOA and FHA claims,
because Delta's own analyses did not reveal statistically significant differences in the prices paid
by borrowers in protected classes. Delta further maintains that the United States' theories of
liability regarding loans brought to it by mortgage brokers are legally insupportable, because,
inter alia, they seek to hold a lender responsible for the conduct of independent third parties.
Delta disputes the United States' RESPA claims, and maintains that the broker
compensation at issue in the Complaint was reasonably related to the value of the goods,
facilities and services provided by brokers in similar transactions in similar markets.
Delta also disputes the United States' HOEPA claims, and contends that it underwrites all
of its loans, including loans covered by HOEPA, based on the borrower's ability to repay, and
does not contract for or charge prohibited prepayment penalties or default interest on HOEPA
loans.
Although Delta disputes each of the United States' allegations, it is nevertheless
committed to furthering the spirit of fair lending and other consumer credit laws by going beyond
what Delta believes is required under applicable law to remedy the violations alleged in the
Complaint.
- RESOLUTION OF THE DISPUTE
The parties have agreed that in order to avoid costly litigation, this controversy should be
resolved voluntarily, and that the terms of this Settlement Agreement shall govern Delta's
practices in all geographic areas in which Delta makes loans. The parties have also agreed that
there should be no evidentiary hearing, trial or other adjudication on the merits, and that entry of
this Settlement Agreement is not to be construed as an admission by Delta of the validity of the
claims asserted against it.
Now therefore, on the basis of the foregoing representations of the United States and
Delta, Delta, its officials, and employees, as well as their successors, collectively referred to as
"Delta", are hereby ORDERED as follows:
- GENERAL PROVISIONS
- Delta is prohibited from engaging in any act or practice that discriminates on the basis of
sex, race, or color in the pricing of mortgage loans as prohibited by FHA and ECOA,
including but not limited to approving and funding loans for which minorities and
females pay more than similarly situated whites or males.
- Delta is prohibited from violating Section 8 of RESPA and Section 3500.14 of its
implementing regulations, and agrees to conduct its dealings with mortgage loan brokers
in a manner consistent with HUD's Statement of Policy 1999-1 Regarding Lender
Payments to Mortgage Brokers (64 Fed. Reg. 10080, March 1, 1999).
- Delta Funding is further prohibited from violating HOEPA (15 U.S.C. § 1639), and
Sections 226.31 and 226.32 of Regulation Z, 12 C.F.R. §§ 226.31 and 226.32, by:
- engaging in a pattern or practice of extending credit to borrowers based on the
borrowers' collateral rather than considering the borrowers' current or expected
income, debt or employment status to determine whether the borrowers are able to
make the scheduled payments to repay the obligations, in violation of Section
129(h) of HOEPA, 15 U.S.C. § 1639(h), and Section 226.32(e)(1) of Regulation
Z, 12 C.F.R. § 226.32(e)(1);
- including in a HOEPA mortgage loan a prohibited prepayment penalty provision,
in violation of Section 129(c) of HOEPA, 15 U.S.C. § 1639(c), and Section
226.32(d)(6) of Regulation Z, 12 C.F.R. § 226.32(d)(6); and
- including in a HOEPA loan a default provision calling for increased interest rate
after default, in violation of Section 129(d) of HOEPA, 15 U.S.C. § 1639(d), and
Section 226.32(d)(4) of Regulation Z, 12 C.F.R. § 226.32(d)(4).
- REQUIRED POLICIES AND PRACTICES CONCERNING DELTA'S BUSINESS
DEALINGS WITH MORTGAGE BROKERS
- Compliance With This Settlement Agreement
To promote the objectives of ECOA, FHA, RESPA AND HOEPA in connection with its
wholesale lending operations, Delta shall conduct its business with mortgage brokers as follows:
- With respect to fair lending, Delta shall:
- adhere to the FHA and ECOA in all aspects of the credit process
including pricing of mortgage loans;
- reject the broker's proposal or make a counteroffer when it believes
the broker's proposed compensation and costs are not permitted
under the fair lending laws; and
- maintain loan underwriting standards designed to ensure that loan
applicants will be placed at the correct credit risk level on a non-discriminatory basis.
- With respect to real estate settlement procedures, and consistent with HUD's
Statement of Policy 1999-1 Delta shall:
- only fund loans where it reasonably believes the compensation to the
mortgage broker is made in exchange for services actually performed
and goods and facilities actually furnished by the broker and the
broker's total compensation is reasonably related to the services
performed and the goods and facilities provided by the broker;
- operate on the understanding that (i) payments to mortgage brokers
by Delta for referral of business are not permissible and (ii) referral
fees are not payments for goods, facilities or services;
- where necessary to arrive at an overall mortgage broker
compensation that is reasonably related to the services performed or
the goods and facilities provided by the mortgage broker, reduce or
eliminate its yield spread premiums or other back-end fees, propose a
reduction in the mortgage broker's front-end charges or take other
action. Delta shall decline to fund the loan if the overall mortgage
broker compensation is not reasonably related to the services
performed or the goods and facilities provided by the mortgage
broker;
- refrain from providing, in exchange for the referral of business, those
settlement services for which the mortgage brokers are receiving
compensation; and
- modify all its existing agreements with mortgage brokers within 60
days of the date of this Settlement Agreement to contain, and ensure
that all future agreements with mortgage brokers contain, a provision
that the mortgage brokers will make timely disclosures to borrowers
concerning the broker's services and compensation, to the extent
required by state law, and, within 60 days of the date of this
Settlement Agreement, Delta shall provide further disclosure, in the
form of Attachment A hereto (the "Broker Information Disclosure") to
each borrower from whom Delta receives a loan application. Delta
shall provide the Broker Information Disclosure no later than three
business days after the loan application is received by Delta.
- With respect to loans covered by HOEPA proposed by brokers, Delta shall:
- reject the broker's proposal when it believes the broker's proffered
documentation of the borrower's income is insufficient to support the
amount of income claimed;
- maintain loan underwriting standards designed to ensure that
extensions of credit are based on the borrower's repayment ability
including the borrower's current and expected income, current
obligations, and employment; and
- maintain loan underwriting procedures designed to ensure that any
borrower's income will be verified and documented to establish a
reasonable basis to believe such income exists.
- Notice to Mortgage Brokers Concerning Compliance With this Settlement Agreement
- Within 60 days of the date of this Settlement Agreement, Delta shall notify each
mortgage broker with which it does business of the compliance requirements set
forth in paragraph IV.A, and shall revise the materials it provides to all brokers to
include the following statements:
- "The Fair Housing Act and the Equal Credit Opportunity Act apply
to all aspects of the credit process including the pricing of mortgage
loans;"
- "It is unlawful to make differing initial price quotations on the basis of
the loan applicant's race, national origin, sex, or age;"
- "The Real Estate Settlement Procedures Act prohibits compensation
to a mortgage broker unless the compensation is in exchange for
services actually performed and goods and facilities actually furnished
by the broker, and the mortgage broker's total compensation is
reasonably related to the value of the services performed and the
goods and facilities furnished by the broker;" and
- "The Home Ownership and Equity Protection Act of 1994 prohibits
the making of non-purchase money mortgage loans that have total
points and fees that exceed eight percent of the total loan amount
without regard to the borrower's ability to repay. Accordingly, all
loans subject to HOEPA must be supported by credible
documentation that the borrower is able to repay the loan.
- In addition, Delta shall offer all wholesale brokers with whom it does mortgage
loan business the opportunity to undergo training similar to the training described
in Section VII.
- MONETARY COMPENSATION
On September 17, 1999, the Superintendent of Banks of New York State ("NYSBD") and
Delta entered into a Remediation Agreement resolving NYSBD's allegations that its examination
of Delta's lending practices revealed violations of the FHA, ECOA, RESPA and HOEPA and
Section 296-a of the New York Executive Law. The settlement includes a $7,250,000.00
"Remediation Fund" by Delta and an "Amelioration Fund" consisting of 525,000 unregistered
shares of common stock ("Stock") of Delta Financial Corporation. The "Remediation Fund" and
the proceeds from the sale of the Stock in the "Amelioration Fund" shall be used to compensate
borrowers identified by the NYSBD and the federal agencies.
One of the purposes of the Remediation Fund is to compensate New York State
borrowers, including residents of minority areas and African American females identified by the
Department of Justice and the NYSBD, who obtained home mortgage loans from Delta between
October 1, 1995 and September 17, 1999 and who allegedly paid more for their loans than the
average borrower who was a resident of non-minority areas or the average non-minority
borrower, and New York State borrowers with respect to whom the NYSBD alleges Delta
violated HOEPA or RESPA. Compensation will be in the form of reductions to monthly
mortgage payments on a going forward basis as set forth in the September 17, 1999 Remediation
Agreement executed by the NYSBD and Delta.
The "Amelioration Fund" will be used to provide monetary restitution to borrowers who
were allegedly harmed by Delta's alleged fair lending, RESPA, and/or HOEPA violations, as
identified by the Department of Justice and the NYSBD. Restitution must be paid to all eligible
New York State borrowers before restitution is made to borrowers outside New York State. Any
borrower to whom compensation is awarded from the Remediation Fund or Amelioration Fund
shall be required, prior to receiving any such compensation, to sign a general release.
- MONITORING AND COMPLIANCE SYSTEM
- Within forty-five days of the date of this Settlement Agreement, Delta shall submit to the
federal agencies for review and approval a new monitoring and compliance system
designed to ensure uniform application of underwriting criteria and appropriate payment
of mortgage broker fees. If the federal agencies do not otherwise notify Delta in writing
within forty-five days after their receipt of the new monitoring and compliance system, it
shall be deemed approved.
- The monitoring and compliance system shall include:
- Development and implementation of policies and guidelines designed to ensure
that the underwriting of mortgage loans is made in compliance with law. Such
guidelines shall be incorporated into Delta's lending policy;
- Development and implementation of a system designed to accurately record data
related to the charging of broker fees on mortgage loans underwritten, closed and
funded by Delta, including the dollar and percentage amount of the broker fee
charged, the amount and type of loan, documentation of any pricing exceptions,
information about the borrower as required by the Home Mortgage Disclosure Act
("HMDA"), the name of the loan officer, and the name of the mortgage broker;
- Development and implementation of a comprehensive system designed to permit
detailed periodic monitoring of mortgage origination pricing practices to ensure
that flexible pricing does not result in discrimination and that mortgage broker
compensation is in exchange for and is reasonably related to the services, goods,
and facilities provided by the broker.
- The development and implementation of a system designed to identify all
borrowers whose loans are subject to the requirements of HOEPA and permit
detailed and ongoing monitoring of file documentation that such borrowers are
able to repay their loans.
- The designation of managers, including senior-level managers, to serve as
compliance officers and to monitor compliance with the foregoing compliance
system; and
- The development and implementation of a disciplinary policy for employees who
violate the required policies and practices described in this Settlement Agreement.
- EDUCATION OF DELTA EMPLOYEES
- Within forty-five days from the effective date of this Settlement Agreement, Delta shall
amend its existing Fair Lending Training Program to include the elements set forth
below, and shall submit the amended training program ("Amended Training Program") to
the federal agencies for review and approval. If the federal agencies do not otherwise
notify Delta in writing within forty-five days after their receipt of the Amended Training
Program, it shall be deemed approved. Such Amended Training Program shall include:
- A detailed discussion of the purpose of, and the prohibitions contained in
HOEPA, ECOA, FHA, and RESPA;
- A detailed discussion of liability for violations of HOEPA, ECOA, FHA, and
RESPA;
- A certification form to be completed by each officer and employee attending the
training program; and
- A schedule pursuant to which the training program and supplemental training
programs will be offered.
- Within sixty days following the approval of the Amended Training Program by the
federal agencies, all Delta officers and employees whose job responsibilities include
contact with consumers or mortgage brokers concerning mortgage loan applications, the
pricing of mortgage loans or the monitoring of mortgage pricing shall attend the
Amended Training Program.
- All new Delta officers and employees whose job responsibilities include contact with
consumers or mortgage brokers concerning mortgage loan applications, the pricing of
mortgage loans or the monitoring of mortgage pricing shall attend the Amended Training
Program within forty-five days of their employment with Delta.
- All Delta officers and employees attending the Amended Training Program shall execute
a certification form stating that the individual has attended the Amended Training
Program, that the individual understands Delta's policies regarding non-discrimination in
the origination and underwriting of mortgage loans, that the individual understands
Delta's disciplinary policies with respect to originating and underwriting mortgage loans
and compliance with HOEPA, ECOA, FHA, and RESPA, and that the individual
understands that failure to comply with such laws may subject the individual and/or Delta
to sanctions.
- Delta shall comply with the training provisions described above in all states in
which it does business; provided, however, that in states other than New York, Delta shall not be
required to provide training in connection with laws that apply only in New York.
- RECORDKEEPING AND REPORTING REQUIREMENTS
- For a period of three years from the date of this Settlement Agreement, Delta agrees to
retain all loan application files submitted for mortgage loans, all loan-related documents
and notices relevant to any pricing decisions, and all documents related to compliance
and monitoring as set forth in Section VI, above. During this period, upon reasonable
notice from the Civil Rights Division of the United States Department of Justice ("DOJ"),
Delta shall make individual mortgage loan application files and related records available
for inspection or copying by the DOJ.
- Delta agrees that it will periodically review its lending operations for compliance with the
RESPA, FHA and ECOA.
- For a period of three years from the date of this Settlement Agreement, Delta shall report
its compliance with this Settlement Agreement to the DOJ semi-annually, beginning with
the period ending September 30, 2000, within forty-five days after the end of each half-year period.(1) Each such report shall include:
- A report on Delta's fair lending pricing requirements; and
- A description of corrective actions taken by Delta to comply with this Settlement
Agreement.
- ADMINISTRATION OF SETTLEMENT AGREEMENT; MISCELLANEOUS
- The Court shall retain jurisdiction for the purpose of enforcing the terms of this
Settlement Agreement for a period of three years from the date it is entered by the Court,
at which time this Settlement Agreement shall terminate. The Settlement Agreement shall
be binding on Delta and any of its employees, representatives, officers, heirs, assigns,
subsidiaries, or successors in interest.
- The parties to this Settlement Agreement shall endeavor in good faith to resolve
informally any differences regarding interpretation of and compliance with this
Settlement Agreement prior to bringing such matters to the Court for resolution.
Furthermore, the United States shall not bring any matter involving compliance with this
Agreement to the Court for resolution unless it reasonably believes that Delta has
materially violated the provisions of this Settlement Agreement. This Settlement
Agreement may be modified by written consent of Delta and the federal agencies. Any
such modification may be submitted to the Court for approval, and shall be deemed
effective immediately upon execution by the parties until such time, if any, that the Court
indicates a lack of such approval.
- For purposes of measuring time periods, the "date of" this Settlement Agreement shall be
deemed to be the date of its entry by the Court.
- Each party to this Settlement Agreement will bear its own costs.
- This Settlement Agreement, when fully executed and performed by Delta to the
reasonable satisfaction of the federal agencies, will resolve all the issues between Delta
and its affiliates (including, without limitation, Delta Financial Corporation), and the
United States respecting the subject matter of the United States' Complaint.
- The entry into this Settlement Agreement shall not be deemed or construed to be an
admission of, or evidence of, any violation of any statute, law or regulation or of any
liability or wrongdoing or of the truth of any of the claims or allegations of the United
States, and may not be used against Delta in any other action or proceeding. The United
States acknowledges and agrees that Delta's good faith compliance with the terms and
conditions of this Settlement Agreement shall not be considered by the Unites States as a
violation of any federal or state law prohibiting discrimination.
- Any requirement, responsibility, or obligation imposed on Delta by this Agreement which
is based upon statute, regulation, or Statement of Policy shall bind Delta only to the
extent that the applicable portion of that authority remains in force and effect.
- This Agreement may be executed in multiple counterparts, each of which shall be deemed
a duplicate original.
- Nothing in this Agreement is intended to confer or limit any right, remedy, obligation or
liability upon any person or entity other than the parties hereto and their respective
successors.
It is so ORDERED this ___ day of _________, 2000.
_____________________________
United States District Judge
The undersigned apply for and consent to the entry of this Order:
For the United States:
JANET RENO
ATTORNEY GENERAL
BILL LANN LEE
ACTING ASSISTANT ATTORNEY GENERAL
JOAN A MAGAGNA
ALEXANDER C. ROSS
VALERIE O'BRIAN
Attorneys
Housing and Civil Enforcement Section
Civil Rights Division U.S. Department of Justice
P.O. Box 65998
Washington, DC 20035
LORETTA E. LYNCH
UNITED STATES ATTORNEY
MARLA TEPPER (MT7529)
Assistant U.S. Attorney
1 PIERREPONT PLAZA, 16th Floor
Brooklyn, NY 11201
GAIL W. LASTER
General Counsel
PETER S. RACE
Assistant General Counsel
KENNETH MARKISON
Assistant General Counsel
U.S. Department of Housing and Urban Development
MICHELLE CHUA
Attorney
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
For Delta Funding Corporation and Delta Financial Corporation:
THOMAS J. NOTO (TN-9279)
DAVID MEDINE
Associate Director for Financial Practices
MELANIE L. HIBBS (MH-0154)
EUGENE R. LICKER (EL-0334)
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, DC 20036-1800
(202) 778-9000
ATTACHMENT A
DELTA FUNDING CORPORATION
1000 WOODBURY ROAD
WOODBURY, NY 11797
800-225-5335
BROKER INFORMATION DISCLOSURE
Date:
File:
Dear Customer:
The purpose of this disclosure is to provide you with an estimate of the fee you will be paying to
your Mortgage Broker in connection with your loan. This disclosure does not include all fees
you will pay for this loan. For that information please refer to the Good Faith Estimate of
settlement costs that you already have or soon will receive, and the HUD-1 form that will be
given to you at closing. The HUD-1 will show the final charges for broker and other fees.
Please read this information carefully so that you make an informed choice. You are entitled to a
copy of this disclosure. Signing this disclosure does not obligate you to obtain the mortgage loan
described below, nor does it constitute a mortgage loan approval.
We have received your application for a mortgage loan from (Name of Mortgage Broker).
1) The Mortgage Broker is expected to charge a total of $_________ for arranging a
mortgage loan of $_______ at a proposed interest rate of ___%.
This amount is made of:
a) $__________ paid by you to the Broker as a percentage of the loan; and $__________ in additional amounts paid by you to the Broker as noted on the
Good Faith Estimate. These amounts will be paid from the proceeds of your loan
and/or directly out of your pocket; and
b) $__________ paid to the Broker by Delta Funding Corp. which increases your
interest rate on the loan;
IF ANY PORTION OF THE BROKER FEE DESCRIBED ABOVE IS PAID FROM THE
PROCEEDS OF THE LOAN, YOU WILL BE OBLIGATED TO REPAY THIS AMOUNT
WITH INTEREST OVER THE TERM OF THE LOAN.
If you would rather pay a lower interest rate on your loan, you may be able to pay higher upfront
fees. If you pay less upfront, you may pay a higher interest rate. If you have any questions about
the different options available to you, your mortgage broker and/or Delta will be glad to discuss
them with you.
2) The Broker's Fee described above is payable only if the loan is approved and accepted by
you.
Please sign and return one copy in the enclosed envelope. Keep the other copy for your files.
_________________________________
(SIGNATURE)
____________________
(DATE)
1. 1 All notices, correspondence, reports, or documents required to be provided to the United States shall be mailed
to the following address:
Chief, Housing and Civil Enforcement Section
Civil Rights Division
U.S. Department of Justice
P.O. Box 65998
Washington, D.C. 20035