IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF CONNECTICUT
UNITED STATES OF AMERICA,
Plaintiff,
v.
SHAWMUT MORTGAGE COMPANY,
Defendant.
_______________________________
COMPLAINT
The United States of America alleges:
- This action is brought by the United States to enforce the
provisions of Title VIII of the Civil Rights Act of 1968
(the Fair Housing Act), as amended by the Fair Housing
Amendments Act of 1988, 42 U.S.C. §§ 3601-3619, the Equal
Credit Opportunity Act (the ECOA), 15 U.S.C. §§ 1691-1691f,
as amended, and, acting upon notification and authorization
to the Attorney General by the Federal Trade Commission, §§
5(a) (1), 5(m)(1) (A), 9, 13(b), 16(a) and 19 of the Federal
Trade Commission Act (the FTC Act), 15 U.S.C. §§ 45(A) (1) ,
45(m) (1) (A), 49, 53(b), 56(a), and 57b.
- This court has jurisdiction of this action pursuant to 28
U.S.C. §§ 1331, 1337a, and 1345; 42 U.S.C. § 3614; and 15
U.S.C. SS 45(m) (1) (A), 49, 53(b), 56(a), 57b, 1691(c) and
1691(h).
- Defendant, Shawmut Mortgage Company (or "the mortgage
company" or "the lender"), is a Connecticut Stock Corporation
incorporated under the laws of the State of Connecticut with
its principal place of business in West Hartford,
Connecticut. Shawmut Mortgage Company is a wholly-owned
subsidiary of Hartford National Corporation, a bank holding
company incorporated under the laws of the State of Delaware
with its principal place of business in Hartford,
Connecticut. Hartford National Corporation is a wholly-owned
subsidiary of Shawmut Services Corporation, a bank holding
company incorporated under the laws of the State of Delaware
with its headquarters in Hartford, Connecticut. Shawmut
Mortgage Company's business includes engaging in residential
real estate-related transactions and regularly extending
credit to persons. The mortgage company is a creditor as
that term is defined, by section 702(e) of the ECOA, 15
U.S.C. § 1692a(e), and is, therefore, subject to the
requirements of the ECOA and its implementing Regulation B,
as amended, 12 C.F.R. Part 202, in effect on or after March
23, 1977.
- Beginning in January 1990, as required by the Home Mortgage
Disclosure Act ("HMDA"), the mortgage company has maintained
a Loan Application Register ("LAR") on which the lender's
employees recorded information about each home loan
application, including the applicants, income and race (or
ethnicity), the loan amount, the type of loan, whether the
subject property was to be owner-occupied, and the action
taken by the mortgage company on the application. The
mortgage company kept the LAR data in computerized form, in
preparation both for the filing of annual HMDA reports to
the mortgage company's federal bank regulatory agency and
for internal reports that were circulated periodically to
its management and employees. On the basis of the LAR/HMDA
reports management of the mortgage company knew that it had
been denying the home mortgage loan applications of black
and Hispanic applicants at substantially higher rates than
white applicants. More specifically, the reports showed
that:
- in 1990 the mortgage company's overall denial rates for
applications for conventional purchase and refinancing
loans combined were 123 of 317 (or 38.8%) for blacks;
68 of 205 (or 33.17%) for Hispanics; and 1,193 of 6,892
(or 17.31%) for whites;
- in 1991 these denial rates were 122 of 359 (or 33.98%)
for blacks; 68 of 222 (or 30.63%) for Hispanics; and
1,122 of 7,634 (or 14.7%) for whites; and
- in 1992 these denial rates were 118 of 555 (or 21.26%)
for blacks; 88 of 360 (or 24.44%) for Hispanics; and
1,594 of 14,999 (or 10.63%) for whites.
- Prior to late 1991, when the mortgage company began to
implement a special program to review the files of denied
minority applicants, it processed applications for home
mortgages in the following manner:
- employees of the mortgage company (usually with the title of "loan counsellor" or "loan originator")
contacted real estate agents and brokers, builders, and
others involved in the sale of residential real estate,
in order to develop sources of referrals of persons
interested in borrowing money to purchase homes (or to
refinance their current outstanding home mortgage
debts).
- It was the responsibility of the loan counsellor to
have those seeking home mortgage loans present an
initial application containing the financial
information deemed necessary by the mortgage company to
make an underwriting decision on the loan application
(i.e., a decision whether to deny the application, to
approve it under the terms requested, or to make a
counter-offer). The required qualifying information
included (among other things): The applicant(s)'
income, employment history, education, past credit
performance, outstanding financial obligations, assets
(liquid and non-liquid), and the applicant(s)'
projected monthly payment for the loan sought
(including principal, interest, taxes, and insurance).
It was also the loan counsellor's responsibility to
ascertain the existence of any "offsetting"
qualifications of the applicant(s) that could
compensate for one or more deficiencies in the required
qualifying information.
- In addition to the information requested of the
prospective borrower(s) by the application form, the
mortgage company required applicant(s) to sign
additional forms authorizing the lender to obtain
documentation of the qualifying information claimed by
the applicant(s). These additional forms included:
- A verification of Employment (VOE) form, to be
executed by the applicant(s)' employer(s) and
returned to the mortgage company, verifying the
applicant(s)' claimed base salary or wages for the
past two years and year-to-date, and secondary
income (such as overtime, bonus, and commission
income). The VOE contains a box to be checked
("yes" or "no") as to whether the applicant(s)'
secondary income is expected to continue;
- A Verification of Deposit (VOD) form, to be
executed by the applicant(s)' financial depository
institution(s) and returned to the mortgage
company, verifying the amount of the applicant(s)'
claimed deposits;
- A mortgage or rent payment verification form,
whichever was applicable, to be executed by the
applicant(s)' former mortgagee or landlord and
returned to the mortgage company, verifying the
applicant(s)' prior mortgage or rent amount and
payment history; and
- A credit report form authorizing a credit
reporting firm selected by the mortgage company to
verify on its behalf the amount and duration of
the applicant(s)' financial obligations and to
obtain both positive and negative information on
the applicant(s)' credit history with respect to
both present and former financial obligations over
the previous seven-year period.
The purpose of the verifications described in sub-paragraph
(c) was to provide the lender with documentary evidence of
the applicant(s)' claimed financial qualifications for loan
approval, i.e., the ability and willingness to repay the
mortgage debt. In those instances where the qualifying
information was not susceptible to verification by use of
standard forms (such as the VOE for the self-employed or the
VOD for those whose assets were not located in depository
financial institutions), the mortgage company had the option
to require applicant(s) to submit alternative documentation
(such as copies of tax returns or proof of liquid assets not
held by a depository institution) directly to the lender.
- Upon receipt of the verification forms by the lender,
it was the responsibility of a loan processor (alone or
in concert with the loan counsellor or the loan
underwriter) to see to it that the forms were complete,
properly executed, and consistent with the
applicant(s), claimed financial qualifications. In
addition, it was the loan processor's responsibility to
place the documentation in the loan file, in
preparation for submission of the application to the
lender's underwriters for a decision. The extent of the
documentation the mortgage company required for each
loan application was dependent upon either the lender's
internal standards with respect to loans it intended to
hold in its own loan portfolio (or the portfolio of one
of its affiliated depository institutions) or, for
those loans that the mortgage company intended to sell,
the external standards required by potential purchasers
of the loan on the secondary mortgage market.
- With the exception of credit reporting agencies that
reported derogatory credit history, those entities that
provided documentation to the mortgage company on the
standard forms described in paragraph 5 provided none
of the verification forms or the qualifying information
contained therein directly to the applicant(s). If the
credit report included derogatory information, the
credit reporting agency, by means of a form letter,
informed the applicant(s) of the existence of the
derogatory information and advised the applicant(s) to
contact the credit reporting agency in order to correct
claimed errors in the report.
- After assembling a loan file containing the
application, the documentation of the applicant(s)'
ability and willingness to repay the mortgage debt, and
an appraisal of the subject property (used to document
the adequacy of the security value of the property to
be mortgaged), the loan processor submitted the file to
the mortgage company's underwriters for a loan
decision.
- It was the responsibility of the underwriter, prior to
making an underwriting decision, to insure that all of
the applicant(s)' claimed qualifying information was
documented for the file, by obtaining the information
from those who had been asked to supply it, or by
requesting the loan processor to do so.
- Thereafter, it was the responsibility of the mortgage
company's underwriters to review the entire loan file
to assess the evidence therein concerning the
applicant(s) ability and willingness to repay the loan
and the security value of the subject property. On the
basis of this assessment, the underwriters made a
decision whether the mortgage company should approve
the loan application under the terms requested, deny
the application under those terms but make a
counteroffer to the applicant(s), or deny the
application. In making these decisions, it was the
underwriter's responsibility to apply rules (or "underwriting guidelines") that were defined either by
the mortgage company's internal standards for those
loans it intended to hold in its own loan portfolio (or
the portfolio of one of its affiliated depository
institutions), or, for those loans that the mortgage
company intended to sell, by the external standards
required by potential purchasers of the loan on the
secondary mortgage market.
- Prior to late 1991, it was the lender's policy to allow its
employees, in carrying out the procedures described in the
previous paragraph, to exercise discretion in deciding the
extent of the efforts they would make to document the
qualifying information of loan applicants. Pursuant to this
policy, the employees were free to decide whether to request
applicants for alternative documentation, depending on a
variety of circumstances, including but not limited to
circumstances:
- when the standard verification forms described in
subparagraphs 5 (c) (i)-(iv) were not provided for
documentation of positive information, or
- when applicants might have been able to supply
additional information that would compensate for
negative qualifying information or an explanation of
any negative information that had been provided.
- Prior to late 1991, it was the lender's policy, pursuant to
its internal underwriting guidelines and the external
underwriting guidelines of its secondary market purchasers,
to allow its underwriters broad discretion in approving loan
applications that failed to meet all guideline requirements,
so long as the facts upon which the exceptions were made
were adequately documented in the loan file. In addition,
the mortgage company permitted underwriters to waive
documentation of specific requirements if the file contained
documentation of compensating or offsetting qualifying
information.
- Prior to late 1991, it was the policy of the mortgage
company to require different or varying levels or degrees of
documentation of applicants' qualifying information,
depending on a variety of circumstances, including but not
limited to:
- the loan product sought by the applicants;
- the applicant(s)' provision of documentation of
offsetting qualifications that could compensate for
inadequacies in or lack of documentation of the applicant(s)' ability or willingness to pay or the
security value of the subject property;
- the mortgage company's contractual arrangements with
one or more secondary market purchasers, under which
the loan purchasers agreed in advance to purchase loans
that had been approved by the lender under exceptions,
specifically set forth in the contract, to the
documentation contained in such purchasers, published
underwriting guidelines; and
- the mortgage company's allowance of formal
"underwriting exceptions," whereby named officers and
employees of the mortgage company were allowed to
obtain the underwriter's approval of loan applications
that failed to meet the lender's underwriting
guidelines or that contained less documentation than
that required of similarly situated applicants not
applying under an exception. To this end the mortgage
company maintained an "exceptions list" that specified
which named officers or employees were entitled to
invoke specifically described exceptions.
- Prior to late 1991, the lender had no mechanism in place to
review the level of diligence exercised by its loan
counsellors, loan processors, or underwriters in obtaining
documentation of black and Hispanic applicants' qualifying
information or to review the level of discretion its
underwriters exercised in applying internal or external
underwriting criteria to their applications.
- During the period January 1990 through late 1991, the
mortgage company failed to take adequate steps to insure
that its loan counsellors, loan processors, or underwriters
exercised the same degree of diligence in obtaining
documentation of qualifying information for black and
Hispanic applicants as they exercised in obtaining such
information for white applicants, or to take adequate steps
to insure that its underwriters applied the same
underwriting standards to black and Hispanic applicants as
they did to white applicants.
- The mortgage company began to make policy changes in late
1991 that were intended to improve its treatment of black
and Hispanic applicants. However, these changes had only
incremental impact prior to late 1992. Specifically, in
late 1991 the mortgage company instituted several changes
in its policies and procedures. This included a procedure
whereby certain of its employees sitting on "Mortgage Review
Committees" were given the responsibility of reviewing the
files of minority applicants whose loans had been denied by
the lender's underwriters. Between late 1991 and late 1992,
the Mortgage Review committee process made some progress,
but was not wholly effective in eliminating discriminatory
practices. Instead of creating a mechanism that would insure
fair treatment of all applicants by loan counsellors, loan
processors and underwriters, the lender allowed the Mortgage
Review Committee to obtain applicant qualifying information
that either contradicted that obtained by the loan
counsellors, loan processors or underwriters or provided
offsetting or compensatory information that would justify
loan approval.
- Prior to late 1992 or early 1993, the mortgage company
failed to instruct its loan counsellors or loan processors
to obtain documentation of, or underwriters to consider:
- the stability of applicants' income (in contrast to the
stability of applicants' employment) in documenting applicants' ability to repay the mortgage loan;
- applicants, prior record of rent and utility payments
(in contrast to credit history as reflected by
applicants, performance in repaying contractual debt)
in documenting applicants, ability and willingness to
repay the mortgage loan;
- applicants' non-traditional sources of cash for down
payment, such as family revolving loans or cash that
was not held by the applicants in depository financial
institutions; and
- the income and assets of applicants, extended family members, who planned to reside at the property subject
to the mortgage but who were not co-applicants, in
documenting applicants' ability to repay the mortgage
loan.
- Prior to late 1991, the lender's management knew or should
have known that the implementation of its policies and
practices resulted in discrimination against black and
Hispanic loan applicants. More specifically, these officials
knew or should have known that:
- at each stage of the loan application process described
in paragraph 5, the mortgage company's employees
exercised the discretion allowed to them by the
policies described in paragraphs 6 though 8;
- black and Hispanic applicants who could have qualified
for approval were being denied loans as the result of
the failure of the lender's employees to undertake
sufficient steps to obtain documentation of the
applicants, qualifying information;
- white applicants were approved when they did not meet
all of the mortgage company's underwriting guidelines
or when the documentation of their qualifying
information was in part missing or incomplete; and
- black and Hispanic applicants were more likely than
white applicants to benefit from the formal changes
made in the lender's documentation requirements as
described in paragraph 12.
From late 1991 to late 1992, the Mortgage Review Committees,
in reversing denials made by underwriters, consistently
found that these employees had failed to exercise the
diligence expected of them in documenting the qualifying
information of black and Hispanic applicants.
- As a result of the manner in which the policies and
practices described in paragraphs 5 through 13 were
implemented, black and Hispanic applicants who sought home
mortgage loans from the mortgage company during the period
January 1990 through late 1991, and in some instances
between late 1991 and late 1992, were:
- subjected to more stringent standards than were white
applicants, either by the failure of the lender's
underwriters to consider their offsetting or
compensating qualifying information to the extent that
such information was considered for white applicants,
or by the underwriters, subjecting them to higher
underwriting standards than those applied to white
applicants;
- provided with lesser opportunities than were white
applicants to document their qualifying information; or
- denied loans under underwriting policies and practices
that had a greater negative impact on their chances for
loan approval than on the approval chances of white
applicants.
- The disparities in denial rates between white home mortgage
loan applicants and black and Hispanic applicants during the
period January 1990 through October 1992 cannot be fully
attributed to differences in the relative qualifications of
white and minority applicants.
- The manner in which the mortgage company's policies and
practices were implemented, as described in paragraphs 5
through 13 constituted:
- discrimination on the basis of race or national origin
in making available residential real estate-related
transactions in violation of Section 805 of the Fair
Housing Act, 42 U.S.C. § 3605(a);
- the making unavailable or the denial of dwellings to
persons, because of race or national origin, in
violation of Section 804(a) of the Fair Housing Act, 42
U.S.C. § 3604(a); and
- discrimination on the basis of race or national origin
in the terms, conditions, or privileges of the
provision of services or facilities in connection with
the sale or rental of dwellings, in violation of
Section 804(b) of the Fair Housing Act, 42 U.S.C. §
3604(b).
- During the period January 1990 through October 1992, on
numerous occasions, defendant has denied mortgage credit to
black and Hispanic applicants, while extending mortgage
credit to similarly qualified white applicants, and has
thereby discriminated against black and Hispanic applicants
on the basis of race or national origin, thereby violating
Section 701(a) (1) of the ECOA, 15 U.S.C. § 1691; and
Section 202.4 of Regulation B.
- Defendant has engaged in the practices described in this
Complaint with knowledge as set forth in Section 5(m) (1)
(A) of the FTC Act, 15 U.S.C. § 45(m) (1) (a).
- The discriminatory practices of defendant as described in
this Complaint were implemented with disregard for the
rights of black and Hispanic persons.
- During the period January 1990 through October 1992, the
defendant engaged in a pattern or practice of discrimination
in home mortgage lending, in violation of the Fair Housing
Act and the Equal Credit Opportunity Act by:
- requiring a higher level of documentation of black and
Hispanic applicants' qualifying information than it
required of white applicants;
- failing to make an effort to obtain documentation of
black and Hispanic applicants, qualifying information
comparable to the efforts made to obtain documentation
of the qualifying information of white applicants;
- failing to obtain qualifying information from black and
Hispanic applicants that would compensate for apparent
disqualifying information;
- failing to approve loans for qualified black and
Hispanic applicants under the same underwriting
standards that were applied to qualified white
applicants;
- failing to approve loans for black and Hispanic
applicants whose qualifications as documented in the
mortgage company's loan files did not meet all of its
underwriting standards but nevertheless met standards
that were equal to or greater than those applied to
similarly situated white applicants; and
- failing to take steps to insure that the policy of
granting exceptions for certain applicants, as
described in paragraph 8 (d), did not result in the
application of discriminatory standards to minority
applicants.
- During the period January 1990 through October 1992, the
defendant engaged in a pattern or practice of discrimination
against minority applicants with respect to credit
transactions, in violation of the Equal Credit Opportunity
Act, 15 U.S.C. § 1691(A) (1), by failing to implement the
policy changes described in paragraph 12, thereby continuing
an overall loan processing system that had the effect of
discriminating against black and Hispanic applicants.
- The implementation of the defendant's policies and practices
as described in this Complaint, constitutes:
- a pattern or practice of resistance to the full
enjoyment of rights secured by the Title VIII of the
Civil Rights Act of 1968, as amended by the Fair
Housing Amendments Act of 1988, 42 U.S.C. §§ 3601-3619;
and
- a denial to a group of persons of rights granted by
Title VIII of the Civil Rights Act of 1968, as amended
by the Fair Housing Amendments Act of 1988, 42 U.S.C.
§§ 3601-3619, that raises an issue of general public
importance.
- Persons who have been victims of defendant's discriminatory
practices as described in this Complaint are aggrieved
persons as defined in 42 U.S.C. § 3602(i). As a consequence
of defendant's practices, these persons have been denied
their rights to equal opportunity in housing, credit, and
residential real estate-related transactions. Some victims
also have experienced other actual, compensable injuries,
such as economic loss.
WHEREFORE, the United State's prays that the court enter an ORDER
that:
- declares that the totality of the policies and practices of
defendant constitutes a violation of the Fair Housing Act,
the FTC Act, and the Equal Credit Opportunity Act;
- enjoins defendant, its agents, employees and successors, and
all other persons in active concert or participation with
it, from discriminating on account of race or national
origin in any aspect of their mortgage lending activities;
- requires defendant to develop and submit to the court for
its approval a detailed plan that: (a) remedies the vestiges
of defendant's discriminatory policies and practices; and
(b) ensures that future black and Hispanic mortgage loan
applicants will be treated in a nondiscriminatory manner
that does not differ from the treatment afforded to white
applicants;
- awards such damages or redress as would fully compensate the
victims of defendant's discriminatory conduct for the
injuries caused by the defendant; and
- assesses civil penalties against defendant, in order to
vindicate the public interest.
The United States further prays for such additional relief as the interests of justice may require.
JANET RENO
Attorney General
JAME P. TURNER
Acting Assistant Attorney General
PAUL F. HANCOCK
Chief, Housing and Civil Enforcement Section
ALEXANDER C. ROSS
JEFFERY SENGER
Attorneys, Housing and Civil Enforcement Section
Civil Rights Division
U.S. Department of Justice
P.O. Box 65998
Washington, D.C. 20035-5998
(202) 514-4713
CHRISTOPHER F. DRONEY
United States Attorney
JOHN B. HUGHES
Assistant United States Attorney
Chief, Civil Division
450 Main Street, Room 328
Hartford, CT 06103
(203) 240-3270
DAVID MEDINE
Associate Director
PEGGY L. TWOHIG
Assistant Director
SANDRA M. WILMORE
Attorney
Division of Credit Practices
Federal Trade Commission
Washington, D.C. 20580
(202) 326-3210