HSBC subprime unit accused of overcharging blacks

NEW YORK (Reuters) - HSBC Finance has been accused in a federal lawsuit of using a subprime lending unit to unfairly target U.S. blacks for extra mortgage fees and charges not paid by white borrowers.

Suyapa Allen, of Stoughton, Massachusetts, borrowed $303,376 from HSBC’s Decision One mortgage unit, but will pay another $911,337 in interest and finance charges over the next 30 years, court papers show.

Her interest and finance charges are about $200,000 more than what a borrower would pay on a conventional 30-year loan with a fixed interest rate of more than 11 percent, according to a standard mortgage calculator.

Her lawsuit claims HSBC and Decision One use a discretionary pricing policy that has a widespread discriminatory impact on black borrowers.

Allen’s allegations come as foreclosures on risky subprime mortgages escalate, driving some U.S. lenders into bankruptcy while forcing others to cut thousands of jobs. The toll on consumers may be lopsided toward blacks and Hispanics because they are more likely to get high-cost loans than whites.

Several studies have shown that trend, including one released recently by the Federal Reserve.

Allen's lawsuit, filed in U.S. District Court in Boston, seeks class-action status against HSBC Finance and Decision One, which are part of London-based banking giant HSBC Holdings Plc HSBA.L. The lawsuit said tens of thousands of people could be in the purported class.

“The case is about HSBC’s practice of opening different doors in different communities,” said Gary Klein, a lawyer for Allen. “(HSBC) opens a more expensive door through Decision One in the black community and a cheaper door through retail offices in communities that are predominantly white.”

HSBC Finance declined to comment on specific allegations contained in the lawsuit.

“However ... we take our fair lending and consumer protection practices very seriously,” the company said in a statement. “Accordingly, we have conducted and continue to conduct reviews of our lending programs, and we are confident that we are treating our customers fairly and with integrity.”

HSBC Finance, formed after HSBC bought Household International Inc in 2003, offers subprime loans through two avenues. One way is through one of its more than 1,300 consumer finance branches that dot the United States.

The other way is through Decision One, which relies on independent mortgage brokers to find borrowers and to submit their applications for funding by HSBC. Many lenders have abandoned or curtailed lending through the independent broker channel, citing problems with underwriting standards.

Klein said Decision One gives independent brokers the right to set part of the price of a subprime loan. He said brokers use this as an opportunity to charge blacks more than whites.

The lawsuit said differences in credit do not account for all of the discrepancy.

“HSBC’s discretionary pricing policy accounts for a significant portion of the disparity,” the lawsuit said. “(It) is unrelated to a borrower’s objective credit characteristics such as credit history, credit score ... and results in purely subjective charges that affect the rate otherwise available to borrowers.”

University of Massachusetts economist Jim Campen’s study of 2005 lending activity in Massachusetts showed that a number of lenders, including Decision One, were more likely to provide high-cost loans to blacks and Hispanics than whites.

He said the subprime mortgage market continues to resemble a used car lot, with the selling price and other charges often negotiated individually and salespeople often having financial incentives to obtain the highest price possible.