MORTGAGE MELTDOWN REVEALS WIDESPREAD RACIAL DISCRIMINATION;  HOW CONSUMERS ARE FIGHTING BACK IN COURT

By Amy Radon, Public Justice Goldberg Attorney
 
We’ve all heard about the “flawed practices,” “shoddy legal documents,” and “fraud so vast it literally can’t be contemplated,” that have come to light through investigations into the mortgage foreclosure crisis.[1]  Now we can add another appalling practice to the list: racial discrimination.  As the lending practices of mortgage companies large and small have come under increasing scrutiny in recent years, it has become painfully clear that African American and Latino borrowers more often than not receive less favorable mortgage terms than similarly-situated Caucasians.[2]  For example, the Center for Responsible Lending found that African American and Latino borrowers are 30% more likely to receive a high-rate loan than Caucasians, even after accounting for differences in risk.[3]  While this aspect of the mortgage meltdown has gone largely unreported by the mainstream media, this may change in the coming year as consumers turn to the courts to vindicate their rights and hold these mortgage companies accountable for creating and utilizing discriminatory lending practices.  This article highlights two such lending practices, and explains that consumers have the law on their side when fighting back against racial discrimination by their mortgage companies. 
 
Racially Discriminatory Lending Practices: Two Case Studies
 
Interest-Rate Steering
 
Willie Mae Jackson is a sixty-one-year-old African American woman who owed $49,000 on her mortgage.  In response to ads running on her local gospel radio station (whose listeners are predominantly African-American) that said she could “consolidate bills” and get “easy money,” Ms. Jackson called the number advertised because she was interested in consolidating her credit card bills.[4]  A representative for (what turned out to be) a mortgage company then set up a meeting with Ms. Jackson and told her that she had been approved for a loan.  The representative instructed Ms. Jackson to sign on the dotted line, without ever telling her the loan amount, the interest rate, the closing costs, or any other essential terms of the loan.    
 
Ms. Jackson later learned that the “loan” she agreed to was a mortgage on her home for nearly $100,000, which was more than double what she previously owed.  Included in the amount of the new loan was a $23,937.23 settlement charge and an additional unrequested disbursement in the amount of $25,999.23.  When Ms. Jackson attempted to return the unrequested disbursement, she was informed that she would incur substantial penalties for doing so.  She later discovered that the terms of her loan included a 9.67% interest rate over thirty years.  As a result, Ms. Jackson won’t pay off her loan until she is eighty-eight years of age.
 
Ms. Jackson filed a putative class action suit against the mortgage company in the U.S. District Court for the Western District of Tennessee.  She has alleged that she is a victim of a technique called “interest-rate steering,” where interest rates and other fees are set by mortgage companies based not on the underwriting risk of extending the loan, but rather on the perceived financial sophistication of the borrower.[5]  She alleges that her mortgage company has targeted this practice of “interest-rate steering” towards African American and Latino neighborhoods in particular, where aggressive advertising campaigns have resulted in these borrowers receiving loan products that are far inferior to those offered similarly-situated Caucasian borrowers.[6] 
 
Discretionary Pricing Targeted at Minority Communities
 
Ana and Ismael Ramirez sought to refinance their Massachusetts home in 2005.  They worked with a broker in their neighborhood to secure a loan through GreenPoint Mortgage Funding.  What they didn’t know was that GreenPoint, which relies on brokers to drum up 93% of its loans in the community, had set up a pricing structure that incentivized its brokers to set interest rates and fees as high as possible, regardless of a borrower’s creditworthiness.[7]
 
GreenPoint’s pricing policy considers both objective components (including FICO scores, property values, and loan-to-value ratios) and subjective components, in that GreenPoint gives each broker the discretion to impose higher fees and charge a higher interest rate than what the borrower would otherwise receive based on objective factors alone.[8]  This “discretionary pricing policy,” as it’s called, can result in huge mark-ups on a loan that have nothing to do with the risk of extending the loan, and each broker gets a share of the profit from the mark-up.   
 
On its face, the discretionary pricing policy utilized by GreenPoint is unfair and deceptive, but does not appear to be discriminatory.  In application, however, it is the predominantly African American and Latino communities that bear the brunt of this practice, as the Ramirezes have alleged.[9]  The Ramirezes’ putative class action complaint, filed in the U.S. District Court for the Central District of California, alleges that the application of GreenPoint’s discretionary pricing policy results in African American and Latino borrowers receiving far less favorable loan pricing than similarly-situated Caucasians.[10]     
 
What Legal Action Can be Taken to Stop These Discriminatory Practices?
 
Consumers who find themselves victims of interest-rate steering, discretionary pricing, or other discriminatory lending practices have the law on their side.  The federal Fair Housing Act (“FHA”) prohibits racial discrimination by “any person or other entity whose business includes engaging in residential real estate transactions . . . in making available such a transaction, or in the terms or conditions of such a transaction.”[11]  Additionally, the federal Equal Credit Opportunity Act (“ECOA”) prohibits creditors (including mortgage companies) from discriminating against any applicant with respect to any aspect of a credit transaction on the basis of race.[12]  Importantly, consumers who file suit under the FHA or ECOA need not prove that the mortgage company intentionally sought to discriminate on the basis of race; it is enough to show that the company utilized a lending practice that has the consequences of adversely impacting members of a protected class, and cannot be justified by a business necessity.  In other words, the consumer may prove that the lending practice has a “disparate impact” on a protected class to have a viable cause of action under the FHA or ECOA.^[13] 
 
To make out a prima facie case of disparate impact discrimination under the either the FHA or ECOA, consumers generally must show “a significant disparate impact on a protected class caused by a specific, indentified . . . practice or selection criterion.”^[14] 

However, establishing a prima facie case is not without its own set of unique challenges. 
 
 What are the Challenges to Establishing a Prima Facie Case of Disparate Impact Discrimination Against Mortgage Companies?
 
One of the biggest challenges consumers face in bringing a disparate impact claim under the FHA or ECOA is demonstrating that the mortgage company’s lending practice did, in fact, have a disparate impact on members of a protected class.  Statistical evidence of a disparate impact is key to overcoming this challenge.  To this end, consumers have at their fingertips a number of publicly-available data centers, the most important of which is the data compiled by the Federal Financial Institutions Examination Council under the Home Mortgage Disclosure Act, which is often referred to as “HMDA data.”  The HMDA data includes yearly analyses of mortgage lending transactions at 8,124 financial institutions throughout the United States, and can be essential to identifying and proving the existence of discriminatory practices.^[15] 
 
For example, in Taylor v. Accredited Home Lenders, an Alabama homeowner brought a putative nationwide class action on behalf of herself and other similarly-situated African American homeowners alleging that her mortgage company utilized a discretionary pricing policy that resulted in African American homeowners paying significantly higher discretionary charges than similarly-situated Caucasian homeowners.^[16]  The homeowner was able to survive a
 
motion to dismiss by citing to the HMDA data from the year she obtained her loan, which demonstrated that African Americans were 31% to 43% more likely to receive a higher fixed-rate loan than Caucasians, and were 15% more likely to receive a higher rate than Caucasians on adjustable rate loans.^[17]  This
 
statistical data was central to the court’s holding that the homeowner had adequately stated a disparate impact claim under the FHA and ECOA.^[18]
 
Another challenge consumers undoubtedly will face when they bring disparate impact claims against mortgage companies is the age-old “pass-the-buck” problem: mortgage companies will argue that, if anyone is responsible for discriminatory lending practices, it is the brokers themselves who impose unfair mortgage terms on members of a protected class.  Plaintiffs must therefore be prepared to demonstrate that the mortgage company exerted some level of control over its brokers, and received some benefit from the discriminatory pricing policy, to ensure that the company can’t point the finger at its brokers to take all the blame. 
 
For example, the plaintiff in Hoffman v. Option One Mortgage Corp. was able to overcome Option One’s finger-pointing by showing that Option One set up rules to govern the ways its brokers applied the discretionary pricing policy, and that the company received a portion of the profit from the additional mark-ups.^[19]  Similarly,

the court in Taylor v. Accredited Home Lenders, Inc. held
 
that the mortgage company could not escape liability for the disparate impact of its loans on minority communities because: (1) the mortgage company required authorized brokers to sign a contract with the company to accept loan applications on the company’s behalf; (2) the brokers used forms provided by the company; and, perhaps most importantly, (3) the company authorized the brokers to impose discretionary mark-ups on the loans and shared the additional income with the broker.[20]  Plaintiffs should therefore investigate the relationship between the mortgage company and its brokers to be able to allege sufficient facts in the complaint to demonstrate the true source of the discriminatory lending practice.  
 
Conclusion
Discriminatory “interest-rate steering” and pricing policies are no more acceptable now than the more overt discriminatory redlining practices that the Fair Housing Act had been enacted to prevent.  In the coming year, as the lending practices of mortgage companies continue to be highly scrutinized, it may be that even more types of racially discriminatory lending practices come to light.  It is essential that consumers know that courts can help—and that the law is on their side—so that mortgage companies are held accountable for violating these consumers’ civil rights.