In what could be a repeat of the easy-lending cycle that led to the housing crisis, the Justice Department has asked several banks to relax their mortgage underwriting standards and approve loans for minorities with poor credit as part of a new crackdown on alleged discrimination, according to court documents reviewed by IBD.Prosecutions have already generated more than $20 million in loan set-asides and other subsidies from banks that have settled out of court rather than battle the federal government and risk being branded racist. An additional 60 banks are under investigation, a DOJ spokeswoman says.No Job, No ProblemSettlements include setting aside prime-rate mortgages for low-income blacks and Hispanics with blemished credit and even counting "public assistance" as valid income in mortgage applications.In several cases, the government has ordered bank defendants to post in all their branches and marketing materials a notice informing minority customers that they cannot be turned down for credit because they receive public aid, such as unemployment benefits, welfare payments or food stamps.Among other remedies: favorable interest rates and down-payment assistance for minority borrowers with weak credit.For example, the government has ordered Midwest BankCentre to set aside almost $1 million in "special financing" for residents living in predominantly black areas of St. Louis. The program includes originating conventional home loans at fixed prime rates for African-American borrowers "who would ordinarily not qualify for such rates for reasons including the lack of required credit quality, income or down payment."The same federal order, signed last month, praises Midwest for adopting "less stringent underwriting criteria" while under investigation.In the case against Citizens Bank of Detroit, settled in May, the U.S. decrees that "the bank may choose to apply more flexible underwriting standards in connection with the programs under this order."Such efforts risk recreating the government-imposed lax underwriting that led to the housing boom and bust, critics fear."It's absolutely outrageous after what we've just gone through," said former Rep. Ernest Istook, a Heritage Foundation fellow. "How can someone both be financially stable enough to merit a mortgage at the same time they're on public assistance? By definition, you don't have the kind of employment that can support such a loan."Justice MarchJustice spokeswoman Xochitl Hinojosa said the anti-discrimination notice "does not compel the banks to make loans to people who do not qualify." She said such measures are "essential to remedy the harmful effects of the banks' conduct."But industry analysts fear Attorney General Eric Holder is rekindling an anti-bank witch hunt launched by Attorney General Janet Reno in the 1990s, when Holder served as her deputy.Some blame that in part for the subprime boom, because banks were ordered to throw open their lending windows to credit-poor minorities. That crackdown spurred the American Bankers Association to distribute to its thousands of members "fair-lend ing tool kits" advising the adoption of more permissive underwriting criteria to help inoculate them from prosecution.In the new prosecutions, Justice acknowledges in every case it did not prove charges of intentional discrimination, while banks have denied any wrongdoing. Many, in fact, earned outstanding ratings from anti-redlining regulators enforcing the Community Reinvestment Act.Istook calls Holder's crusade an "egregious overreach by the government." He says many of the targets are smaller banks without the resources to fight a protracted legal battle.The House Judiciary Committee plans to investigate."This is an expansion of the law," said a congressional investigator. "They're pushing the envelope as far as they can go in the enforcement of civil rights."DOJ Demands 'Nondisclosure'As part of settlement deals, prosecutors have required banks to sign "nondisclosure agreements" barring them from talking about the methods used to allege discrimination. Bank lawyers contend the prosecutors are trying to hide the shaky legal grounds on which the cases are built. "It's horrible what they're doing at the civil rights division," said Reginald Brown, a partner at Wilmer Hale in Washington, who has represented banks in connection to recent race-bias investigations. "They don't have any proof, just theories."He added, "They want you to sign something saying you agree, under the condition of any settlement with them, that you won't disclose what their theories were. That's because their theories are loopy and wouldn't stand the light of day."One such theory — "disparate impact" — holds that merely a difference in loan application outcomes is enough to prove racial discrimination — even if no intent exists on the part of loan officers to contrast based on the color of applicants, and even legitimate business factors — such as credit scores and down payments — help explain disparities in loan outcomes between white and black applicants.Under this broad theory, banks have been accused of racism simply for failing to open branches or aggressively market mortgages in black neighborhoods — regardless of the demand for, or viability of, such loans in those areas.Following this theory, the government has ordered several banks to advertise in black media and open branches in black neighborhoods, despite the weak economy.Justice confirmed it has asked banks to keep its methodologies, which include computer-based statistical analysis, secret."In certain circumstances, when a bank has requested details of our analysis, the department has requested that a defendant agree to a confidentiality agreement," Hinojosa told IBD.Critics say Holder's interpretation of civil-rights law is even more radical than Reno's.For the first time, prosecutors are judging banks for the secondary impact their policies have on entire minority communities, not just households. And they're ordering reparations accordingly.In announcing a recent $2 million settlement with Dallas-based PrimeLending, Civil Rights Division chief Tom Perez said, "We will require lenders to invest in the community that they've harmed."Another Reno protege, Perez has compared bankers to Klansmen. Only difference is, he said, bankers discriminate "with a smile" and "fine print." He said this kind of racism, though more subtle, is "every bit as destructive as the cross burned in a neighborhood."Perez has put in place an infrastructure to enforce "fair lending" — including a first-of-its-kind Fair Lending Unit staffed with more than 20 lawyers, economists and statisticians.He's appointed a special lending cop to run it — Special Counsel for Fair Lending Eric Halperin, who also worked for Reno. Before returning to Justice, Halperin was chief Washington lobbyist for the Center for Responsible Lending, an anti-redlining group that urged banks to relax lending standards for low-income urban borrowers before the crisis.Perez has required bank defendants to earmark potentially millions in funding for inner-city community organizers — who must be approved by Justice. Critics say lenders are being forced to bankroll Acorn clones that often exist just to shake them down for risky loans.Hinojosa declined to provide a list of these "qualified organizations."Perez is also prosecuting banks for "reverse redlining through the targeting of minority communities for predatory loans."Istook finds it odd that the government is condemning lenders for doing too well what it pressured them to do in the name of diversity before the crisis. "Banks are damned if they do, damned if they don't," he said.Also, critics say Justice is acting as a bank regulator by enforcing its own quota system for multicultural loans. The civil rights division has set "benchmarks" for minority lending, and will monitor bank lending volume and activity in that area among the banks it's suing.In effect, Justice is using private banks to carry out affirmative-action lending, Istook says, a campaign he describes as "legal plunder."