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SunTrust to Settle Racial Lawsuit

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On Thursday, the Department of Justice (DoJ) made the announcement that the mortgage-lending unit of SunTrust Banks Inc. (STI - Free Report) 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 - Free Report) 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 - Free Report) 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.

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