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Banks Face Growing Risk of Big Lending Discrimination Suits

November 19, 1992

NEW YORK (AP) _ As attention increases on banks’ discriminatory lending practices, the likelihood is growing that the industry may be socked with a new round of potentially large lawsuits, analysts said Thursday.

The case of Fleet Finance Inc. in Georgia, which faces suits over alleged lending discrimination and unfair lending practices in Georgia, is regarded as a test case in the industry.

Fleet Finance is a unit of Fleet Financial Group of Providence, R.I., the largest banking company in New England.

″There is a heightened awareness in the fair lending community and among home loan applicants that discrimination exists in the market place,″ said Alan Fishbein, director of the Center for Community Change, a fair housing advocacy group in Washington. ″If they feel they have been treated wrongly, it will force them to seek legal recourse.″

Frank Barkocy, a bank analyst for Advest Inc., said the lessons of the Fleet’s Georgia experience could resonate throughout the industry.

″The risk could be greater than Fleet in the sense that other entities could be challenged by similar suits going forward,″ Barkocy said.

Fleet faces five lawsuits in Georgia, two of them class action lawsuits which accuse Fleet of violating Georgia’s usury law, racial discrimination, violation of the state’s fair housing statutes and fraudulent loan practices.

Class action lawsuits cases pose a far greater threat to defendants because of the large number of plaintiffs, which makes the potential liability enormous. If the defendants lose, judgments can be financially devastating.

Many of the loans in question, particularly to blacks, were as much as 10 percentage points higher than prevailing rates, said Jack Long, an Augusta, Ga.-based lawyer representing borrowers in one of the lawsuits.

Fleet said it has done nothing illegal and is fighting the lawsuits. However, Fleet last month agreed to renegotiate thousands of the mortgages in question, at a cost of about $38 million.

The Fleet case took a twist on Thursday when a housing activist group, Union Neighborhood Assistance Corp. of Boston, said it estimates Fleet could face $1.2 billion in potential liabilities from the Georgia lawsuits.

Such a judgment would place Fleet in serious financial jeopardy, the group said. It asked the Federal Reserve Board to order Fleet to stop paying dividends, increase its loan loss reserve and set aside $605 million to compensate aggrieved homeowners.

Fleet spokesman Tom LaValle accused the group of carrying out a vendetta and said the $1.2 billion liability figure ″both inaccurate and irresponsible.″

Mortgage discrimination and fair lending are much-discussed topics in the banking industry these days following the recent release of the Home Mortgage Disclosure Act reports. These reports show blacks are turned down twice as often as whites for mortgages.

Another key development was a lending discrimination study in October by the Boston Federal Reserve which showed when economic factors were the same, 17 percent of black mortgage applicants would be refused loans vs. a 11 percent refusal rate of white borrowers.

Several bankers and community activists said they were unaware of any lawsuits filed based on the latest reports, but many said they wouldn’t be surprised if there are.

″As soon as somebody cracks the code and figures out the boilerplate lawsuit to file, I think they will be coming out of the woodwork,″ said Marty Leary, a researcher for the Union Neighborhood Assistance Corp.

Julia F. Johnson, assistant vice president for community lending at Banc One Corp. in Columbus, Ohio, said a new round of class action lawsuits ″certainly is possible.″

″I would think it would certainly be an avenue open to consumers,″ she said. Johnson added that she doesn’t believe the kinds of lending practices alleged in the Fleet case are widespread.

One prominent banking lawyer cautiously dismissed the significance of any rise in such lawsuits.

″My own guess is that it is not going to be a very attractive field,″ said H. Rodgin Cohen, a partner at Sullivan and Cromwell in New York. ″Today, every bank I deal with is extraordinarily sensitized on this issue of discrimination.‴

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