Chicago—Attorney General Lisa Madigan has announced that she has filed a lawsuit against Countrywide, a subsidiary of Bank of America, for unlawfully discriminating against African American and Latino borrowers in home mortgage sales, in violation of the Illinois Human Rights Act and the Illinois Fairness in Lending Act. The Attorney General filed her complaint in Cook County Circuit Court against Countrywide Financial Corporation; Countrywide Home Loans, Inc.; and Full Spectrum Lending, Inc., an arm of Countrywide that mostly sold subprime loans.
Madigan’s complaint alleges that the former mortgage giant steered African American and Latino borrowers into risky subprime mortgages more often than similarly-situated white borrowers. The complaint also alleges that minority borrowers paid more for mortgages across Countrywide’s product line, including its prime loans. Significantly, Madigan’s analysis of Countrywide loan data found that the racial disparities could not be explained by objective factors, such as borrowers’ credit scores or debt-to-income ratios.
At the height of the housing bubble, Countrywide was the largest mortgage lender in the country and in Illinois. Countrywide was also the state’s top seller of subprime loans. Bank of America bought Countrywide in 2008.
The failure of millions of higher-cost, or subprime, mortgages nationwide is largely responsible for triggering the ongoing foreclosure crisis and resulting economic recession.
“Countrywide’s illegal discriminatory lending practices destroyed the wealth and dreams of thousands of African American and Latino homeowners,” Madigan said. “Bank of America needs to be held accountable by taking financial responsibility for cleaning up the devastation of the predatory company that it chose to take over.”
Madigan’s lawsuit is the result of a two-year investigation of Countrywide’s lending policies and practices that were in place during the years directly preceding the collapse of the housing market. The Attorney General issued a fair lending subpoena to Countrywide in March 2008, after a Chicago Reporter study of federally collected mortgage lending data for the Chicago area found that, in 2006, Countrywide Financial Corporation sold higher-cost loans to 50.9 percent of its African American borrowers and 33.8 percent of its Latino borrowers, while only 19.5 percent of the company’s white borrowers received high-cost loans.
The Attorney General's investigation included a statistical analysis of data from over 83,000 Countrywide mortgages originated in Illinois from 2005 through 2007. Madigan’s office also interviewed former Countrywide employees and mortgage brokers, and spoke with Countrywide borrowers about their home loans.
As outlined in the complaint, Madigan’s analysis of Countrywide’s loan data found that the odds that African American and Latino borrowers would receive a higher-cost subprime mortgage from Countrywide were three times greater than those of white borrowers. In addition, Madigan’s investigation found that Countrywide charged African American and Latino borrowers higher interest rates and fees on loans spanning the company’s range of products, including its prime products, as compared with similarly-situated white borrowers.
Madigan’s investigation further found that the disparities in Countrywide’s subprime sales and loan pricing were the result of Countrywide policies that gave employees and mortgage brokers almost unlimited discretion in the selection and pricing of loans.
“It’s disturbingly clear that if you were an African American or Latino borrower who walked into a Countrywide store, you likely paid more for your mortgage than a white borrower,” Madigan said. “Countrywide effectively imposed a surcharge on mortgage loans based on race and ethnicity.”
The Attorney General’s lawsuit asks the court to find that Countrywide engaged in a pattern and practice of discrimination, enter an injunction against Countrywide to permanently prohibit the company from discriminatory acts as described in the complaint, make restitution to all victims of Countrywide’s discrimination, pay civil penalties of $25,000 for each violation of the Illinois Human Rights Act, and order any other relief that the court deems equitable.
Today’s filing is the second lawsuit Madigan has brought against Countrywide. In 2008, she filed a consumer fraud lawsuit against the lender for its major role in driving the foreclosure crisis, and in November 2008, she led negotiations that resulted in an $8.7 billion settlement of that lawsuit with Bank of America.
Today’s filing is also the second fair lending lawsuit Madigan has brought against a major mortgage lender. In July 2009, Madigan filed a lawsuit against Wells Fargo for violating the state’s fair lending and civil rights laws, becoming the first state attorney general in the nation to sue a federally-chartered lender for its role in creating the foreclosure crisis. The Wells Fargo litigation is ongoing.
Countrywide Steered Minority Borrowers to Subprime Loans
Specifically, Madigan’s complaint alleges that Countrywide’s retail employees and mortgage brokers had the discretion to choose the type of products offered to borrowers and to manipulate borrowers’ financial information that was entered into the company’s automated underwriting system. As a result of this discretion, the complaint alleges, minority borrowers were steered into subprime mortgages when they qualified for prime loans.
The Attorney General further alleges that Countrywide failed to institute an adequate system for automatically referring eligible borrowers from subprime to prime. Although the company added an “Uplift” protocol to its underwriting system in 2002 to supposedly prevent prime-eligible borrowers from being placed into subprime loans, Madigan alleges that the Uplift program failed as a safeguard because it depended on a combination of automated underwriting and human discretion. When interviewed by Madigan’s office, former Countrywide employees and brokers reported that they had rarely or never seen subprime loans uplifted to prime.
Minority Borrowers Paid More for Countrywide Loans
Madigan’s complaint alleges similar abuses of discretion in the pricing of Countrywide’s loans. As outlined in the lawsuit, Countrywide provided employees and brokers with rate sheets that spelled out the mortgage interest rates borrowers qualified for, based on certain credit factors. However, Madigan found that Countrywide gave employees and brokers discretion to sell borrowers loans with higher interest rates than those indicated by the rate sheets.
The complaint also alleges that Countrywide’s broad discretionary pricing policies allowed employees and brokers to use a number of devices to increase the interest rates on loans. These included manipulating the amount of cash a borrower took out on a refinance, which would increase the loan-to-value ratio, and adding features to the loan such as a prepayment penalty or an adjustable interest rate.
Countrywide’s Compensation Structure Incentivized the Sale of Subprime and High-Cost Loans
In addition to Countrywide’s discretionary policies, the Attorney General alleges that the company’s compensation structure provided employees and mortgage brokers with incentives to steer prime-eligible borrowers into subprime loans and to sell loans with the highest interest rates possible. As cited in the complaint, Countrywide provided those incentives by linking compensation to volume of sales, paying employees more for originating subprime loans, basing compensation in part on the interest rate of the loan, and paying brokers a premium for loans with features associated with subprime mortgages.
Countrywide Aggressively Marketed its Loans to Minority Borrowers
Additionally, Madigan alleges that early in the last decade Countrywide began aggressively marketing its services and products to a so-called “emerging market” of untapped borrowers, namely African Americans and Latinos. Minority borrowers thus became the targets of Countrywide’s new marketing strategy at a time when the company’s compensation structure was increasingly incentivizing the sale of risky subprime loans. The complaint alleges that as a result of these events, African American and Latino borrowers disproportionately suffered the harmful effects of Countrywide’s toxic loans, and these effects were magnified by Countrywide’s discretionary product selection and pricing policies.
Illinois homeowners who believe they may be victims of Countrywide's discriminatory lending practices should contact the Attorney General's office via a special e-mail address at CountrywideDiscrimination@atg.state.il.us or by calling the Attorney General’s Homeowners Helpline at 1-866-544-7151.
Madigan also reminded homeowners that her Web site, at www.IllinoisAttorneyGeneral.gov, provides resources to assist homeowners in crisis including her Illinois Mortgage Lending Guide, a resource manual containing step-by-step instructions for those struggling to make their loan payments and a list of HUD-certified counseling agencies that offer default counseling services. Homeowners who do not have easy access to the Internet should call the Attorney General's Helpline, to quickly receive the guide by mail.