CFPB, DOJ Hit Provident Brokers Over Pricing Discretion


Provident Funding Associates, a private mortgage lender, has agreed to pay $9 million to settle allegations its brokers charged minorities higher fees and interest rates, federal regulators said Thursday.

In a joint complaint from the Consumer Financial Protection Bureau and the Justice Department, regulators said Provident gave some pricing discretion to its brokers, resulting in them discriminating against 14,000 African American and Hispanic borrowers.

“Consumers should never be charged higher fees because of their race or national origin,” said CFPB Director Richard Cordray in a press release. “We will continue to root out illegal and discriminatory lending practices in the marketplace. I look forward to working closely with our partners at the Department of Justice to ensure consumers are treated fairly.”

California-based Provident was cited largely because of the pricing structure it uses with its brokers, which allowed them to raise the interest rate and broker fees beyond a price based on the applicant’s creditworthiness. Authorities said that Provident set a “risk-based interest rate” — like a baseline interest rate set on the wholesale mortgage —and then brokers were allowed to raise that rate before it was offered to the consumer. Provident would then give a portion of the revenue from that higher rate as payment to the broker.

This was a common practice, known as a yield-spread premium, until new compensation rules were put in place in 2011.

In addition to the higher interest rates, Provident gave brokers discretion to charge higher fees to consumers that were unrelated to the borrower’s creditworthiness. This resulted in African Americans and Hispanics being charged higher fees than white applicants, authorities said.

The named practices occurred between 2006 and 2011. Provident changed its pricing practices after 2011 in line with new rules, the order said. However, the company said in an emailed statement that it already had a cap in place during the time of the alleged violations.

“During the time period at issue, for the protection of borrowers, Provident Funding also imposed a cap on mortgage broker compensation that was more restrictive than its competitors. Provident Funding had no knowledge that any mortgage brokers were allegedly overcharging certain borrowers,” the company said. “The government has not alleged that Provident Funding or any of its employees intentionally discriminated against any borrowers or financially benefitted from any of the fees that mortgage brokers charged for their services.”

Authorities do not necessarily need to prove whether an action was intentional in order to cite a company for discrimination. Both the Justice Department and CFPB have been the strongest advocates in using a legal theory called disparate impact to cite unintentional discrimination under the fair lending laws.

“The Civil Rights Division is committed to ensuring that all types of lending institutions, including wholesale mortgage lenders, comply with the fair lending laws,” said General Vanita Gupta, the Justice Department’s principal deputy assistant attorney of the civil rights division, in a press release. “We look forward to further collaboration with the Consumer Financial Protection Bureau in protecting consumers from illegal and discriminatory lending practices.”

The case was a referral from the Federal Trade Commission to the Justice Department in which the CFPB later joined in 2012. The Justice Department said “Provident cooperated fully with the” investigation.

The company has agreed to the settlement without admitting or denying the allegations; though it appears Provident is denying the allegations in a separately issued statement.

“Provident Funding denies that it has engaged in any wrongdoing and disagrees with the government’s claim that it should be legally responsible for the fees charged borrowers by independent mortgage brokers, who were not Provident Funding employees and who had a non-exclusive broker relationship with Provident Funding,” the company said. “However, it is pleased that an acceptable resolution that will benefit borrowers has been reached.”

The company has agreed to pay $9 million into a fund that will compensate affected consumers. The order also calls for Provident to pay for an independent administrator to contact the consumers and distribute the payments from the fund.

“The settlement demonstrates this U.S. Attorney’s office will devote the resources necessary to root out and address unfair lending practices that affect citizens of this district,” said U.S. Attorney Melinda Haag of the Northern District of California, in a press release. “The law is clear: access to mortgage loans may not be made more difficult because of an applicant’s race or national origin. We are glad that Provident has agreed to put an end to this practice without engaging in protracted litigation.”

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