(Recasts lead with Santander denial; adds comment from Santander and background on Providence population)
BOSTON May 29 (Reuters) - Providence, Rhode Island, filed a federal lawsuit against Santander Bank on Thursday alleging it has refused to make prime mortgages available in the city's minority neighborhoods, a charge the bank rejected.
The suit, filed in U.S. District Court for the District of Rhode Island, claims that since 2009 Santander deliberately reduced lending in minority neighborhoods while expanding in predominantly white ones, violating the U.S. Fair Housing Act.
"Many borrowers in minority neighborhoods are qualified for prime loans, but Santander has written them off," Providence Mayor Angel Taveras said in a press release announcing the lawsuit.
Prime mortgages offer borrowers the lowest interest rates, something that generally results in substantial savings over the rates offered on sub-prime loans.
Providence began investigating potentially discriminatory lending in late 2012, after the Spanish bank gained a foothold in the market when it completed its purchase of Sovereign Bank in 2009, a major provider of mortgage loans in the city. It compared lending in white and minority neighborhoods for a two-year period before Santander's purchase of Sovereign Bank with the four-year period after, according to the press release.
Providence is Rhode Island's biggest city, with a population of roughly 178,000. Hispanics are the largest ethnic group, at 39.7 percent, followed by whites, at 37.1 percent, and blacks at 13.1 percent, according to data company Cubit,
The city said it found Santander's average annual mortgage originations increased in white neighborhoods but declined sharply in minority neighborhoods.
"While other major mortgage lenders have had modest declines in minority neighborhoods due to economic conditions, Santander's decline is significantly greater," the city said, adding that the practice of unfairly turning away minorities risked holding down property values and hindering economic growth.
Santander denied that it has discriminated.
"We categorically reject this accusation and will vigorously defend ourselves against the legal action. However, we are willing to work with the City of Providence to allay its concerns," a Santander spokeswoman said in an email.
Foreign banks have been under pressure by U.S. regulators. The Federal Reserve has brought them under much closer scrutiny since the 2007-2009 financial crisis. In March, the Fed blocked Santander and several other foreign banking firms from carrying out plans to raise their dividends or buy back shares after finding weaknesses in their U.S. stress test results.
Santander, which is making a big push in the United States, appointed Sheila Bair, a former head of the U.S. deposit guarantee fund, as an independent board member in January. Bair is known as an outspoken critic of big banks and an advocate for banking reform. (Reporting by Richard Valdmanis; Editing by Leslie Adler)