During the height of the financial crisis, NOW on PBS highlighted the efforts of the city of Memphis in pursuing legal claims against Wells Fargo bank for some of its practices during the housing bubble. City officials argued that the bank’s mortgage practices were harmful to minority borrowers. Furthermore, they alleged that bank officials often steered minority borrowers to subprime loans when many would have qualified for loans on much better terms. These practices, they argued, led to foreclosures and price gouging that had a disproportionate impact on communities of color. For the city, this meant lost tax revenue and more funds spent on policing foreclosed homes that became a magnet for arson and vandalism. Whole neighborhoods were ravaged. On block after block, even homeowners without subprime loans saw their property values fall as foreclosure sales and abandoned properties dragged down home prices.
After the NOW ON PBS segment aired, Memphis and surrounding Shelby County filed a lawsuit in federal court alleging that Wells Fargo’s practices violated federal anti-discrimination law. Last month, the parties settled: the bank committed to investing more than $400 million in loans to spur economic development in a region hard hit by the recession.
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This settlement most likely benefited from the evidence plaintiffs uncovered regarding the bank’s mortgage practices. Former bank officials revealed in written testimony that employees at the bank referred to minority customers as “mud people” and subprime loans as “ghetto loans.” Early on, the bank tried having the case dismissed. However, the judge found that given these testimonies and other incriminating data showing significant disparities in loan pricing and terms between minority and white communities, the plaintiffs had established the basic elements of a discrimination case. The case was allowed to proceed, and, last month, the parties settled. While many were initially skeptical about the city’s chances, the large settlement is a sign that its claims had substantial merit. And the Memphis-Shelby County case is not the only one of its kind to settle in recent months.
Recently, other high-profile cases with similar claims have also resulted in large settlements. The U.S. Department of Justice settled anti-discrimination cases involving allegations similar to those raised in the Memphis-Shelby County case with two mortgage lenders: Countrywide Financial, one of the largest subprime lenders, and SunTrust Mortgage. Countrywide, now a Bank of America subsidiary, agreed to pay out more than $300 million in damages and SunTrust an additional $12 million. Both settlements will be used to set up funds to compensate borrowers of color who were unfairly steered towards subprime loans.
These cases allege that mortgage lenders engaged in discriminatory lending practices before the housing crash, particularly when it came to subprime lending. Often, subprime lenders would offer mortgage loans on different terms to different racial groups. For example, in 2006, more than 50 percent of minority borrowers were saddled with subprime loans, while only 18 percent of white borrowers received such loans. Even when minority borrowers had similar income and credit profiles as their white counterparts, they were about 70 percent more likely to end up with a subprime loan. One New York Times study of middle-income, minority borrowers in the New York metro area found that such borrowers were five times as likely as white borrowers to be sold higher cost loans even when they had similar — or even higher — incomes.
Bringing subprime loans to communities of color on discriminatory terms is known as “reverse redlining.” Ironically, for years, these communities were shut out of borrowing opportunities by a practice known as “redlining.” After the Great Depression, which was partially brought on by bad mortgage practices, mortgage lending became more consumer oriented. Unfortunately, mortgage lenders did not always serve all consumers. In the absence of anti-discrimination laws around mortgage lending, federal agencies and bank officials often drew red lines around some communities they considered poor credit risks. These communities were more often than not populated by low- to moderate-income minorities.
With civil rights legislation in the 1960s, Congress made such practices illegal. Four decades after that legislation was passed, the practice of rejecting a borrower on the basis of race, ethnicity or gender is pretty rare. At the same time, during the height of the real estate bubble of the 2000s, traditional banks still failed to adequately serve low-income, minority communities. Instead of having access to traditional borrowing opportunities, many prospective minority borrowers found themselves unwittingly steered towards subprime loans with adjustable mortgage rates and prepayment penalties. Because these practices involved targeting certain communities for loans on unfair terms, as opposed to excluding them from traditional lending opportunities, such practices are referred to as “reverse redlining.” Lawsuits like the one filed by Memphis and Shelby County have alleged that these practices violate anti-discrimination laws, and these recent settlements are evidence that these types of claims are beginning to gain traction.
While some have gone so far as to blame minority and low-income borrowers for the housing bust, these lawsuits reveal that it is likely that such borrowers were often intentionally discriminated against and steered into subprime loans. While it is true that minority communities have seen a disproportionate number of foreclosures, fault can hardly lie with borrowers, who could not know they had better options when lenders steered them into faulty loans. Rather, the mortgage lenders and brokers who knowingly made loans to them on unfair terms should shoulder the lion’s share of the blame, and these successful cases are starting to hold those at fault accountable.
Right now, landmark settlements like those awarded in the Wells-Fargo, Countrywide and SunTrust cases can bring much-needed relief to borrowers saddled with loans on unfair terms, and spark economic development in some of the communities hardest hit by the current recession.
If other communities see these benefits, could they follow suit? If the foreclosure crisis has hit certain communities harder than others, local governments should investigate incidences of racial steering in mortgages and foreclosure practices, and take actions similar to those advanced by Memphis-Shelby County. For example, one suit very similar to the Memphis-Shelby County case is progressing in Baltimore. The Department of Justice and the Consumer Financial Protection Bureau should also expand their efforts in this area, and not just close the books on any outstanding investigations into these practices because they’ve scored a couple of victories. With many borrowers affected by these practices now underwater on their mortgages, one fix that could come out of lawsuits and investigations into discriminatory lending practices are loan modifications of tainted loans to bring them in line with present home values.
But anyone interested in pursuing such avenues will have to move quickly. Time is running out. Some claims may be limited by the statutes of limitations on the types of claims they might bring. In addition, many mortgage lenders that engaged in some of the worst conduct in the lead up to the financial crisis are no longer around, having shuttered their doors once the subprime party ended. As a result, some homeowners may be left without recourse. For those that still have claims, those interested in pursuing them will need to act soon if they are to have any chance of rectifying past wrongs.
Raymond Brescia is an assistant professor of law at Albany Law School. For updates on these and other stories surrounding the foreclosure crisis, follow Raymond Brescia on Twitter at @rbrescia.