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How to Investigate a Fair Lending Case

How to Investigate a Fair Lending Case

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How to Investigate a Fair Lending Case

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  1. How to Investigate a Fair Lending Case HUD 2010 National Fair Housing Policy Conference July 22-23, 2010

  2. Types of Fair Lending Cases Pricing Discrimination Redlining Underwriting Servicing Predatory Lending/Harassment (only if targeted at a protected class)

  3. 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)

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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…

  15. 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

  16. 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

  17. 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

  18. 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)

  19. 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)

  20. 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

  21. Potential Applications of Reverse Redlining Theory • Allegations of discrimination in: • Mortgage fraud targeted at protected groups • Reverse mortgage scams • Loan modification scams

  22. 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