Bank of America discrimination settlement: A result of subprime swindle

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It seems there are two types of thieves, the ones who break into your house and steal your TV set and those who convince you to sign on the dotted line. Bank of America, who purchased Countrywide Financial Corporation in 2008, recently agreed to pay $355 million to settle charges that they discriminated against African-American and Hispanic borrowers.

If you’ll recall, a subprime borrower is one who has experienced a poor history of payment management and has a low FICO score such that he or she must pay higher rates of interest to compensate the lender for the additional risk. Subprime loans were subsequently sold to investment bankers by the original lender, who then used them as collateral for bonds known as mortgage backed securities.

The subprime mortgage crisis disproportionately affected African-Americans, for more than 40 percent of black borrowers received subprime mortgages in 2006 as opposed to one-fifth of white borrowers. In fact, an examination of 50,000 home loans by the Center for Responsible Lending found that blacks were a third more likely to get a high-interest loan than white borrowers with the same credit profile.

Unfortunately, many of these loans were interest only loans or adjustable-rate mortgages that offered a low introductory rate, but increased in as early as a year from inception. Consider a typical $250,000, 3.5 percent adjustable-rate mortgage with a 2 percent rate-hike cap. If the monthly payment is now $1,123, after the first adjustment, the monthly payment will be $1,419. After the second adjustment, the monthly payment will be $1,748 — a $625 per-month increase. That means that the homeowner had to come up with $7,500 more each year just to maintain the same mortgage.

These predatory obligations had a catastrophic effect on entire neighborhoods of African-American households. Keep in mind that once a home is in foreclosure, the value of other houses nearby are stripped of equity and become depressed, making it difficult for otherwise qualified borrowers to refinance an adjustable rate mortgage into more affordable terms.

It turns out that while young black men are stereotyped as serial criminals, influential banks were slinging mortgage backed securities from the street corners of lower Manhattan in broad daylight. The high interest rates made them attractive to investors addicted to favorable returns, the foul scent of prejudice and moral bankruptcy seen as the cost of doing business.

Americans have been clamoring for retribution for what many consider to be fraudulent behavior by the banking industry. It should be mentioned that Bank of America has also settled for $20 billion with angry investors of subprime bonds, not to mention a $315 million settlement with investors who claim they were misled about bonds sold by Merrill Lynch, another troubled company purchased by the bank.

It remains to be seen if such measures will serve as a disincentive to pursue unscrupulous business practices or represent yet another well rehearsed slap on the wrist. After all, Countrywide had net earnings of $674 billion from 2004-2007. There will be no commemorative DVD celebrating the bias settlement and it’s doubtful anyone will get their home back, but at least somebody was held accountable, and we all know that was far from a guaranteed.