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How to Investigate a Fair Lending Case. HUD 2010 National Fair Housing Policy Conference. July 22-23, 2010. Types of Fair Lending Cases. Pricing Discrimination Redlining Underwriting Servicing Predatory Lending/Harassment (only if targeted at a protected class).

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how to investigate a fair lending case
How to Investigate a Fair Lending Case

HUD 2010 National Fair Housing

Policy Conference

July 22-23, 2010

slide2

Types of Fair Lending Cases

Pricing Discrimination

Redlining

Underwriting

Servicing

Predatory Lending/Harassment

(only if targeted at a protected class)

recent fha fair lending cases
Recent FHA Fair Lending Cases

U.S. v. AIG FSB and Wilmington Finance (2010)

broker fee pricing (mortgages)

U.S. v. First United Security Bank (2009)

pricing and redlining (mortgages and small business loans)

U.S. v. First Lowndes Bank (2008)

pricing (mobile home loans)

illustrative doj redlining cases
Illustrative DOJ Redlining Cases

U.S. v. First United Security Bank (2009)

pricing and redlining - mortgage and small business

US v. Centier Bank (2006)

HMDA and CRA small business loans

US v. First American Bank (2004)

HMDA, consumer and CRA small business loans

US v. Old Kent Bank (2004)

HMDA and CRA small business loans

doj redlining cases
DOJ Redlining Cases

There is a market for prime loans in majority- minority areas.

A Fed study cites the following data

In 80% minority census tracts more than 62% of borrowers have high credit scores

slide6

DOJ Redlining Investigations

  • Review lender’s business practices, including:
      • Branching and other channels
      • Lending policies and practices
      • Advertising and other outreach
  • Evaluate lending performance
  • HMDA data review, including:
      • Compare applications and originations in minority areas with other lenders
      • Compare lending activity in areas with various income and demographic characteristics
      • Assess market share in minority and non- minority areas
slide7

DOJ Redlining Cases

  • Failure to provide lending services to minority areas
      • Few or no branches
      • Little or no marketing
      • CRA assessment area excluding minority areas
      • Extremely low proportion of loans
united states v first united security bank 2009
United States v. First United Security Bank (2009)
  • Redlining evidence included long term pattern in majority African-American counties and census tracts of:
    • no branches
    • little or no marketing
    • exclusion from the bank’s three
    • separate CRA assessment areas
    • extremely low proportion of loans
united states v first united security bank 20091
United States v. First United Security Bank (2009)
  • Redlining claim:
  • Evidence of low proportion of loans in majority African-American counties and census tracts developed from HMDA analysis
  • Used “market area” designated in SEC 10K reports because African-American areas were excluded from bank’s CRA assessment areas & bank operated outside of MSAs
united states v first united security bank 20092
United States v. First United Security Bank (2009)
  • Complaint alleged that from 2004-2006:
  • Bank made only 218 of its 1563 mortgage loans (14%) in majority-minority census tracts
  • Comparable lenders made 31% of such loans in majority minority census tracts (twice as many)
  • This difference is statistically significant
united states v first united security bank 20093
United States v. First United Security Bank (2009)
  • Complaint alleged that from 2004-2006:
  • Bank made only 245 of its 2134 CRA small business loans (11.5%) in majority-minority census tracts
  • All lenders made 21% of such loans in majority minority census tracts (almost twice as many)
  • This difference is statistically significant
united states v first united security bank 20094
United States v. First United Security Bank (2009)

Consent order filed with complaint includes:

• non-discrimination injunction

• one new branch in a majority A-A area

• training requirements

• affirmative outreach and marketing

• revised CRA assessment areas

united states v first united security bank 20095
United States v. First United Security Bank (2009)

Monetary relief:

• $500K in loan discount fund

• $110K for outreach

• $55K damages for African-American

customers charged higher interest rates

doj redlining settlements
DOJ Redlining Settlements

All recent redlining settlements include:

  • Nondiscrimination provisions
  • New branches in previously redlined areas
  • Outreach & consumer education
  • Training and changes to bank procedures
  • Monetary relief ranging from $3 to $10 million in loan subsidies for previously redlined areas

And the results…

united states v mid america bank 2002
United States v. Mid America Bank (2002)
  • 2000: 4% of HMDA originations in majority-minority census tracts
  • 2003: Consent Order entered
  • 2004: 12% of HMDA originations in majority-minority census tracts
  • 2006: 14% of HMDA originations in majority-minority census tracts
  • 2008: Consent Order terminated
reverse redlining
Reverse Redlining

Targeting underserved communities for abusive lending practices

Redlining by prime lenders leaves minority areas vulnerable

Investigations may focus on:

Large percentage of loans made to minorities

Specific marketing to minorities

Predatory nature of loans

reverse redlining1
Reverse Redlining

Must demonstrate that a defendant’s lending practices were:

  • “unfair” or “predatory” and
  • either intentionally targeted on the basis of a protected category

or

  • that there is a disparate impact on the basis of protected category
reverse redlining2
Reverse Redlining

When there is direct evidence that the defendant deliberately targeted a protected class with unfair terms in a real-estate related transaction, comparative evidence of the defendant’s treatment of other nonprotected classes need not be established.

Matthews v. New Century Mortg. Corp., 185 F.Supp.2d 874 (S.D. Ohio 2002)

Barkley v. Olympia Mortg. Corp., 2007 WL 2437810 (E.D.N.Y. 2007)

reverse redlining through use of discretionary pricing
Reverse Redlining Through Use of Discretionary Pricing

A number of class action lawsuits have alleged that lenders discretionary and subjective pricing practices had a disparate impact on the cost of loans extended to minority borrowers

Ramirez v. GreenpointMortg. Funding, Inc., 633 F. Supp. 2d (N.D. Cal. 2008)

Miller v. Countrywide Bank, N.A., 571 F. Supp. 2d 251 (D. Mass. 2008)

Taylor v. Accredited Home Lenders, Inc., 580 F.Supp.2d 1062 (S.D. Cal. 2008)

disparate impact allegations
Disparate Impact Allegations

Plaintiffs relied on statistical data about the prevalence of subjective risk-based pricing

on minorities – more likely to receive:

  • subprime loans
  • higher yield spread premiums
  • higher fees
  • steered into less advantageous loan products
slide26

Potential Applications of Reverse Redlining Theory

  • Allegations of discrimination in:
    • Mortgage fraud targeted at protected groups
    • Reverse mortgage scams
    • Loan modification scams
slide27

U.S. Department of Justice

Civil Rights Division

Housing and Civil Enforcement Section, NWB

www.usdoj.gov/fairhousing

Jon M. Seward, Deputy Chief

(202) 305-0009

jon.seward@crt.usdoj.gov