IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA,
Plaintiff,
v.
FIDELITY FEDERAL BANK, FSB
Defendant
_____________________________
SETTLEMENT AGREEMENT AND ORDER
The United States of America filed this Action against
defendant Fidelity Federal Bank, FSB ("Fidelity") alleging a
pattern or practice of violations of the Equal Credit Opportunity
Act, 15 U.S.C. §§ 1691, et seq. ("ECOA"), and its implementing
regulation at 12 CFR Part 202 ("Regulation B"). Fidelity has denied the allegations and asserts that it is committed to compliance with the fair lending laws and regulations and that it
has conducted its lending at all times in accordance with ECOA
and Regulation B. The United States and Fidelity have agreed to
enter into this Settlement Agreement simultaneously with the
filing of this Action to resolve fully and finally all claims
asserted, or that could have been asserted, in the Action.
I
INTRODUCTION
Beginning in 1997, Fidelity's prior management, operating
under the auspices of the prior ownership of the Bank, entered
into a new line of business of issuing and servicing credit
cards. Fidelity entered into credit card marketing agreements
with American Direct Credit LLC ("ADC"), Direct Furniture, Inc.
("Direct Furniture"), First Alliance Corp, and MMG Direct Inc.
Under these agreements, Fidelity agreed to issue its MasterCard
to qualified applicants who had applied to these service
providers for credit. These service providers agreed to
undertake certain processing, underwriting, and collection
services.
Fidelity's regulator, the Office of Thrift Supervision
("OTS"), commenced a safety and soundness examination of Fidelity
on June 15, 1998. That examination criticized the credit quality
and internal controls of Fidelity's credit card operation. The
OTS Report of Examination, delivered to Fidelity October 14,
1998, alleged that the Bank's then existing management had in
place an infrastructure that was inadequate for effective credit
card oversight prior to engaging in this activity, and that
significant growth in credit cards had been achieved without
adequate internal controls and oversight by the then existing
management and the then existing Board of Directors.
On May 17, 1999, OTS began a regularly scheduled compliance
examination of Fidelity. The OTS concluded that the credit card
programs had created a high level of compliance, legal, and
reputation risk and focused the examination on the subprime
credit card programs. On the basis of that examination as well
as information voluntarily provided by Fidelity prior to the
examination, OTS alleged numerous substantive violations of ECOA
and other consumer protection laws. OTS referred the pattern or
practice of possible ECOA and Regulation B violations by Fidelity
to the Department of Justice on March 2, 2001.
II
ALLEGATIONS AND RESPONSE
The United States alleges that Fidelity issued credit cards
in violation of ECOA and Regulation B, both through its own
policies and by failing to ensure that the above-mentioned
service providers had policies in place which would ensure their
compliance with ECOA and Regulation B. The United States further
alleges that Fidelity is responsible, through its relationship
with the service providers, for the following:
- engaging in abusive collection practices in its credit card program which harassed customers on the basis of their
Hispanic national origin;
- discouraging applicants who received income from public
assistance from applying for Fidelity credit cards and having a
policy of offering applicants who received income from public
assistance less favorable terms on Fidelity credit cards than
similarly situated applicants who did not receive public
assistance;
- having a policy of requiring all members of a household
to sign an application for a Fidelity credit card;
- failing to adjust applicants' nontaxable income to make
it comparable to taxable income, which disadvantaged applicants
receiving income from nontaxable sources, such as child support,
retirement benefits, social security, and disability payments;
- having a policy of denying credit to Fidelity credit
card applicants unable to read and understand English;
- having a policy requiring that multiple Fidelity credit
card applications from persons listed under the same telephone
number be rejected;
- failing to provide complete adverse action notices in a
timely fashion, containing the specific reasons for the adverse
action and the applicants' rights under ECOA;
- pulling a credit report on a non-applicant spouse; and
- failing to comply with the record-keeping, data
collection and reporting requirements of Regulation B.
Fidelity denies the allegations of the United States and
denies specifically that it has violated ECOA, Regulation B or
any other fair lending law or regulation. Fidelity asserts that
its credit card programs were operated in a non-discriminatory
manner, in compliance with ECOA, Regulation B, and other fair
lending laws and regulations, and provided access to credit to a
generally-underserved population. Fidelity notes that it has
cooperated voluntarily with the examinations by the OTS and the
subsequent investigation by the United States Department of
Justice.
III
RESOLUTION OF DISPUTE
The Parties have agreed that to avoid costly and protracted
litigation this controversy should be resolved voluntarily. 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 and Order is not to be
construed as an admission by Fidelity of the validity of the
claims asserted against Fidelity. The Parties intend that this
Agreement shall resolve and discharge all claims that were or
could have been brought by the United States against Fidelity in
this Action.
Now therefore, on the basis of the foregoing representations
of the United States and Fidelity, it is hereby ORDERED,
ADJUDGED, and DECREED as follows:
IV
GENERAL NONDISCRIMINATION PROVISIONS
- Fidelity is permanently enjoined from engaging in, and from knowingly permitting any of its Service Providers (as defined below) from engaging in, any act or practice in
connection with its Credit Card Programs (as defined below)
that violates ECOA or Regulation B. The term "Service
Providers," as used in this Settlement Agreement, is defined
as third parties who provide marketing, servicing and
underwriting services for Credit Card Programs.
- Fidelity shall ensure that any program through which it
originates, owns, or services credit card accounts (the
"Credit Card Programs") is free from any violation of ECOA
or Regulation B.
V
CREDIT CARD PROGRAM OPERATIONS
- To promote the objectives of ECOA and Regulation B with respect to Fidelity's current or future Credit Card Programs, Fidelity shall:
- inform its current and future credit card Service Providers that Fidelity will adhere to ECOA and
Regulation B in all aspects of the credit process,
including by ensuring that any activities undertaken by
its credit card Service Providers comply with ECOA and
Regulation B;
- ensure that all future applicants for credit cards
issued by Fidelity are not placed in an underwriting
risk classification on any basis that would violate
ECOA or Regulation B;
- ensure that all underwriting standards for its current
and future Credit Card Programs are developed in
compliance with ECOA and Regulation B;
- ensure that its current and future credit card programs
comply with ECOA's regulatory notification, data
collection and record retention requirements, including
by ensuring that its credit card Service Providers
comply with such requirements;
- ensure that all current and future collection
activities performed by Fidelity, or on credit card
accounts owned by Fidelity, comply with ECOA and
Regulation B;
- ensure that all current and future program materials,
including training material, credit application forms,
and adverse action notice statements, used in Fidelity
Credit Card Programs conform to the requirements and
prohibitions of ECOA and Regulation B; and
- require its current and future credit card Service
Providers to undergo fair lending training.
VI
COMPLIANCE AND RISK MANAGEMENT PROGRAM
- Within sixty days of the entry of this Settlement Agreement, Fidelity shall provide to the Department of Justice a comprehensive Compliance and Risk Management Program (the
"Program"). The Parties shall endeavor in good faith to
agree on the terms of the Program, which shall be
implemented within thirty days of the Parties' agreement on
its terms.
- The Program shall be designed to confirm that, before
Fidelity offers any new Credit Card Program that it does not
currently offer or engages in such activity with a third
party Service Provider (collectively, "New Activities"),
Fidelity and any third party Service Provider involved in
the New Activities will have in place policies, procedures,
experienced personnel, and controls necessary to comply with
ECOA and Regulation B.
- The Program shall specify the responsibilities and authority
of management for compliance, and shall provide mechanisms
to ensure accountability and establish standards for
implementation of New Activities, including:
- identification of applicable legal requirements;
- establishment of appropriate expertise within Fidelity and confirmation that third parties have appropriate levels of expertise;
- due diligence review of any third-party Service
Provider prior to entering into any binding
commitment with the third party;
- review of agreements with third-party Service
Providers to ensure proper allocation of
compliance responsibilities and mechanisms to
monitor third-party performance;
- development or review of policies and procedures;
- development of compliance tools to assist staff;
- testing of systems, including document
preparation, servicing, and management information
systems;
- review of documents and disclosures;
- adoption of non-discriminatory underwriting
criteria and pricing guidelines;
- analysis of empirical data on which risk-based
criteria are based;
- monitoring of the use of credit scoring systems
and collection of information for periodic
validation;
- review of marketing, advertising, and collections
strategies;
- staff training in compliance responsibility or,
for third parties, confirmation of the adequacy of
such training;
- development of effective internal controls and
meaningful reporting;
- periodic independent testing of internal controls
and compliance; and
- prompt post-implementation review and testing.
- The requirements of this Section shall be binding on
Fidelity, its employees, successors and/or assigns.
VII
IDENTIFICATION AND COMPENSATION
OF AGGRIEVED PERSONS
- Within five business days after entry of this Settlement Agreement, Fidelity shall deposit the sum of $1.6 million into the Fidelity Compensation Fund Trust Account (the
"Compensation Fund"). The Compensation Fund shall be
deposited in a separate interest bearing account. The
Compensation Fund shall accrue interest at least equal to
the coupon issue yield equivalent of the average accepted
auction price for the last auction of fifty-two week United
States Treasury bills settled immediately prior to the date
of the entry of this Consent Decree, in accordance with
28 U.S.C. § 1961. Fidelity shall provide written
verification to the Department of Justice of the deposit of
this sum of money into such an account within three business
days thereafter. The interest that accrues on the monies in
the Compensation Fund shall become part of the Fund.
- The Department of Justice will have full and sole discretion
in determining the identity of each aggrieved person
eligible for relief and the amount of monetary compensation
to be distributed to each such aggrieved person.
- The costs of locating, notifying, and paying aggrieved
persons shall be paid from the Compensation Fund.
- Within thirty days of entry of this order, Fidelity shall
provide to the Department of Justice any written information
in its possession or custody (including, to the extent
available, electronically stored data) relating to
applications for credit cards submitted to Fidelity for the
ADC and Direct Furniture credit card programs between
January 1, 1997, and September 30, 2000, including
information concerning originations and servicing for those
programs, and collections logs and histories. In addition,
Fidelity shall promptly make available to the Department of
Justice any other information in its possession, custody or
control which the Department may reasonably request in
connection with the identification of aggrieved persons or
the location of those persons after they have been
identified.
- Fidelity shall have no ability to recover any of the monies
deposited into the Compensation Fund.
- Within thirty days of receiving a written request from the
Department of Justice identifying aggrieved persons (by
providing, at a minimum, full name and social security
number), Fidelity shall request that Equifax, Trans Union
and Experian (the "Credit Bureaus") delete any adverse
credit notification for the identified aggrieved persons
reported to the Credit Bureaus by Fidelity.
- The requirements of this Section shall be binding on
Fidelity, its employees, successors and/or assigns.
VIII
CONSUMER EDUCATION PROGRAM
- The Consumer Education Fund shall consist of any excess funds remaining in the Compensation Fund after compensating the aggrieved persons, which shall be distributed to
consumer education groups to be mutually agreed upon by the
Department of Justice and Fidelity. Each group will receive
a share of available funds as determined by the Department
of Justice.
- The consumer education provided under this Section will
include the distribution of informative pamphlets or other
forms of literature and sponsorship of credit counseling, or
educational workshops or forums focusing on, but not limited
to:
- the fact that different credit card products carry different prices/rates, and that different sources
charge different prices/rates for essentially the same
product, and that the same source may charge different
prices for the same product;
- the importance of shopping among different providers of
credit, and the questions to ask while shopping;
- how to evaluate and compare the ultimate price of
competing loan products;
- options to obtain credit that are available to
borrowers with impaired credit; and
- the non-discrimination requirements and other rights
guaranteed by ECOA and Regulation B.
IX
TRAINING
- Within sixty days of entry of this Settlement Agreement, Fidelity shall advise all employees engaged in Credit Card Program activities and current credit card Service Providers of the purpose and requirements of this Settlement
Agreement.
- Within one hundred and twenty days of the date of entry of
this Settlement Agreement, Fidelity shall train all of its
personnel involved: (i) in negotiating agreements to market
or service Credit Card Programs; (ii) in developing credit
policies for Credit Card Programs; (iii) in credit
solicitation for Credit Card Programs; and (iv) in credit
review processes and/or in credit/servicing for Credit Card
Programs, of the requirements of ECOA, Regulation B, and
this Settlement Agreement. Future employees engaged in
Credit Card Program activities shall complete such training
prior to assuming any responsibility in the above-listed
areas. Fidelity shall maintain a log of the attendees at
each training. Copies of these logs shall be retained for
the life of this Settlement Agreement and shall be subject
to the inspection provisions of the Agreement. The
requirements of this Paragraph, except with respect to the
training of future employees, shall apply equally to any
successors in interest and/or assigns of Fidelity.
- Fidelity shall provide ongoing training on an annual basis
for all persons subject to the provisions in Paragraph B,
above, regarding the requirements of ECOA, Regulation B, and
this Settlement Agreement.
- All current and future training material for Credit Card
Programs developed and used by Fidelity shall conform to the
requirements of ECOA, Regulation B, and this Settlement
Agreement.
X
RECORDKEEPING AND
REPORTING REQUIREMENTS
- During the term of this Settlement Agreement, Fidelity shall retain all records related to compliance with the Agreement. This shall include credit card application files submitted for credit cards issued by Fidelity, as well as all credit
card-related documents and notices relevant to any classification as to underwriting risk and any documents related to servicing or collection activities of credit cards issued by Fidelity.
- During the term of this Settlement Agreement, upon
reasonable notice from the Department of Justice, Fidelity
shall make all documents required to be maintained pursuant
to the Agreement available to the Department of Justice for
inspection and copying at the Department of Justice's
expense.
- During the term of this Settlement Agreement, Fidelity shall
report compliance with this Settlement Agreement to the
Department of Justice semi-annually. The reports shall be
submitted to the Department of Justice within ninety days
after the last business day of Fidelity's second and fourth
fiscal quarters. Each compliance report shall detail the
actions taken to comply with this Settlement Agreement since
the date of this Settlement Agreement, or the date of the
prior report, as applicable, including a description of all
compliance training, the dates held, instructors, content,
and the individuals who attended. Each report shall also
for the applicable time period:
- describe all new third-party Service Provider
arrangements for the provision of credit cards;
- include a copy of all new credit card credit policies
and third-party credit card Service Provider
agreements;
- list by category any new consumer complaints regarding
Fidelity's credit card programs; and
- include, in machine-readable form from its automated
loan tracking system for all new credit card
applicants, the following information, to the extent
available:
- the application number;
- the date the application was received;
- the source of the application;
- the number and relationship of co-applicants;
- the source of income;
- the type and amount of credit applied for and/or
received;
- the action taken on the application and the date;
- the reason for any adverse action (if applicable);
and
- delinquency status (if applicable).
- The requirements of this Section shall be binding on
Fidelity, its employees, successors and/or assigns.
XI
JURISDICTION, DISMISSAL AND ENFORCEMENT
- The Parties stipulate and the Court finds that the Court has personal jurisdiction over the Defendant for purposes of this civil action, and subject matter jurisdiction over the claims in the civil action pursuant to 28 U.S.C. §§ 1331 and 1345, and 15 U.S.C. § 1691e(h).
- This Settlement Agreement and Order shall remain in effect
for a period of three years from the date it is entered by
the Court.
- This case is dismissed with prejudice, except that this
Court shall retain jurisdiction for the duration of the
Settlement Agreement for the purpose of enforcing the terms
of the Agreement. After the three-year term of the
Settlement Agreement, it shall be considered to be
terminated, without need for further action by the Parties,
and the Court shall no longer have jurisdiction over this
matter or the Parties.
- This Settlement Agreement may be modified at any time by
written agreement of the Parties, and without the need for
Court approval. Any and all such written modifications
shall be considered to be part of the Agreement.
- The Parties agree to work in good faith and to use their
best efforts to seek the Court's approval of this Settlement
Agreement, to implement the terms of the Agreement, and to
resolve informally any differences regarding interpretation
of and compliance with this Agreement prior to bringing such
matters to the Court for resolution.
THE PARTIES CONSENT TO THE ENTRY OF THIS SETTLEMENT AGREEMENT AS
INDICATED BY THE SIGNATURES OF COUNSEL BELOW:
FOR PLAINTIFF UNITED STATES OF AMERICA:
ALAN VINEGRAD United States Attorney Eastern District of New York |
RALPH F. BOYD, JR. Assistant Attorney General Civil Rights Division
|
MARLA TEPPER (MT7529) Assistant U.S. Attorney Civil Rights Litigation 1 Pierrepoint Plaza, 16th Fl. Brooklyn, NY 11201 |
JON M. SEWARD Deputy Chief MICHELLE ARONOWITZ KENNETH M. SCOTT (KS0940) Attorneys Housing and Civil Enforcement Section Civil Rights Division U.S. Department of Justice 950 Pennsylvania Ave., N.W. Washington, DC 20530 (202) 305-1680 |
FOR DEFENDANT FIDELITY FEDERAL BANK, FSB:
|
ANDREW L. SANDLER ALAN KRIEGEL ANAND S. RAMAN
Skadden, Arps, Slate, Meagher & Flom LLP 1440 New York Avenue, N.W., Washington, DC 20005 (202) 371-7000 |
IT IS SO ORDERED.
UNITED STATES DISTRICT JUDGE
Document Filed: July 8, 2002