The U.S. attorney found that J.P. Morgan Chase allowed mortgage brokers to vary the interest rate they charged customers based on factors other than creditworthiness—something that isn’t uncommon in wholesale-banking agreements where brokers can increase rates based on a number of application factors. Brokers make money on these loans through fees charged on the loan itself, but also based on something called the yield-spread premium, which occurs when the rate on a loan is higher than the rate designated by the bank based on creditworthiness alone. In other words, brokers had a financial incentive to increase interest rates within the parameters allowed by their bank agreement (there is usually a limit to how much more brokers can charge for differing loan factors) in order to get paid more from a loan. But in J.P. Morgan Chase’s case, the lawsuit claims, the discretion given to mortgage brokers resulted in higher rates being charged on the basis of race and ethnicity, which is federally prohibited.
While the brokers might have been the bad actors in this case, Bharara and his office find that J.P. Morgan Chase had a legal responsibility—and the available data—to determine whether pricing discretion was being used in violation of the law. In their complaint, Bharara and his office note that “there were less discriminatory alternatives available to J.P. Morgan Chase than these policies or practices.” Those efforts might have included more robust auditing of pricing practices and explicit instructions that discrimination based on race and ethnicity wouldn’t be tolerated. The failure of J.P. Morgan Chase to adequately monitor the pricing practices of their brokers, and to prevent or remedy practices that resulted in racial and ethnic discrimination, violates both the Federal Housing Act and the Equal Credit Opportunity Act, the Justice Department alleges. (Bharara’s office declined to comment for this article)
Though J.P. Morgan Chase denies allegations of wrongdoing, The Wall Street Journal reported on Wednesday that the bank had agreed to pay $55 million to settle the claim just hours after the lawsuit was filed. In a statement, a spokesperson for J.P. Morgan Chase explained that the bank had "agreed to settle these legacy allegations that relate to pricing set by independent brokers." The money will likely be used to fulfill the lawsuits request for civil damages and compensation of borrowers who suffered monetary damages as a result of the bank’s mortgage practices.