SunTrust to Settle Racial Lawsuit - Analyst Blog
June 01 2012 - 7:45AM
Zacks
On Thursday, the Department of Justice (DoJ) made the
announcement that the mortgage-lending unit of SunTrust
Banks Inc. (STI) has agreed to pay nearly $21 million to
settle civil charges against it. The settlement agreement was filed
with the eastern district court of Virginia.
The lawsuit alleged SunTrust of discriminatory lending practices
against qualified African-American and Hispanic borrowers on home
loans.
After reviewing nearly 8,50,000 loans, including loan terms and
creditworthiness of the borrowers, the DoJ revealed that SunTrust
overcharged (higher fees and interest rates) about 20,000 minority
borrowers in 34 states and Washington, D.C. compared with white
borrowers who had similar credit profiles. Majority of these
victims were not even aware of this bias and the trap they were
falling into.
The settlement amount paid by SunTrust would be distributed
amongst the aggrieved borrowers. The DoJ reviewed loans between the
period from 2005 to 2009 and revealed that the anti-discrimination
laws were indeed violated by the company.
The DoJ’s civil rights division, created in 2010, mainly focuses
on banks and financial institutions that are suspected of
discriminating against minority borrowers. At present, the
department is pursuing nearly 20 lawsuits with charges related to
discriminatory practices against minorities who are buying
homes.
SunTrust has, however, denied such charges but agreed to the
settlement to put an end to the legal battle. SunTrust is not the
only bank entrapped in such lawsuits. Earlier this week,
Wells Fargo & Co. (WFC) also agreed to settle
a similar lawsuit by assuring over $432 million in lending as well
as other investments in Memphis, Tennessee. The lawsuit accused the
company of racially discriminatory practices in lending.
The lawsuitwas filed by Memphis and Shelby County in 2010, which
accused Wells Fargo of victimizing African-American neighborhoods
over rapacious loans. This conduct of Wells Fargo since 2000 has
led to significant foreclosures in these neighborhoods. Notably,
the company is battling charges from the DoJ under laws which
forbid bias against minority homebuyers.
Moreover, Bank of America Corporation (BAC)
settled similar civil charges of $335 million against its
Countrywide Financial unit in December 2011.
We believe that such settlements provide some relief to the
companies and their shareholders as it reduces the litigation
overhang. However, the dent on its financials and goodwill cannot
be ignored.
Shares of SunTrust currently retain a Zacks #2 Rank, which
translates into a short-term Buy rating.However, considering the
fundamentals, we maintain a long-term ‘Neutral’ recommendation on
the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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