Over the last six months, three mortgage lenders reached settlements over claims of mortgage discrimination that arose during the height of the housing frenzy of the last decade. Whether these settlements are the beginning of the end of efforts to draw attention to race-based predatory lending during the housing bubble, or if they are only the start of a trend, remains to be seen. But the choice is clear between using these settlements to fuel interest in and support for more aggressive advocacy around these issues and claiming "our work is done here." The first option offers a path that can help resolve some of the outstanding legal issues that stand in the way of a full housing recovery. Indeed, steady progress to resolve claims of mortgage discrimination can help to slow the stream of foreclosures and stabilize housing prices, thereby improving the lot of millions of homeowners across the country. The second option means, quite simply, that hundreds of thousands of borrowers will remain trapped in loans on unfair terms solely because of their race. In other words, option two is not really an option.
The recently settled cases involve a particular kind of mortgage discrimination: what is known as "reverse redlining," the practice of targeting borrowers in low- and moderate-income communities, typically communities of color, for loans on unfair terms when compared to the loans that would be made to other borrowers of similar creditworthiness. When reverse redlining is carried out along racial lines, it violates federal civil rights statutes.
Subprime lending during the housing bubble had a particularly racial tinge. Borrowers of color were far more likely than their white counterparts to take out subprime loans. As research by the Federal Reserve shows, in 2006, even controlling for creditworthiness, African American borrowers were nearly twice as likely to be steered towards subprime loans as white borrowers of similar income.
Private litigators and the U.S. Department of Justice have started to make headway as they investigate and explore the legal ramifications of these lending discrepancies. In late December 2011, the Justice Department and the attorney general of the State of Illinois settled reverse redlining lawsuits against a Bank of America subsidiary, Countrywide Financial. The settlement sets up a fund of $335 million to compensate borrowers of color who were illegally steered into subprime loans when they qualified for loans on better terms. Similarly, the DOJ recently resolved an investigation of practices at SunTrust bank's mortgage unit. SunTrust has also agreed to set up a fund, this one of $12 million, for its victims. Finally, in late May, Wells Fargo agreed to settle claims filed against it by the City of Memphis and Shelby County in Tennessee. The claims there alleged both discriminatory pricing of loans and that Wells Fargo's foreclosure practices had a discriminatory impact in those communities. There, Wells has committed to making hundreds of millions of dollars in loans available in Memphis and surrounding Shelby County, a portion of which will go to low- and moderate-income borrowers.
The relief through the payment of damages for bank misconduct, and the availability of millions of dollars in mortgage funds, some of which, hopefully, can go to mortgage refinancing, will be welcome assistance to borrowers who experienced discriminatory practices in mortgage origination or when facing foreclosure. As a result of these settlements, hundreds of thousands of borrowers may be able to get out from under predatory loans, meaning that they will have both smaller monthly mortgage payments and more money available for consumer purchases, which will strengthen the economy generally. When coupled with the settlement with five of the largest banks for so-called "robo sign" practices in the prosecution of foreclosures, which puts roughly $25 billion in funds available for mortgage principal reduction, we may start to see such efforts have a real impact on the foreclosure pipeline.
Already, there are some positive signs that the housing market is starting to strengthen. If more borrowers can get out from under mortgages that were tainted by discriminatory pricing, and, in turn, refinance or receive mortgage principal reduction, some of the communities hardest hit by the foreclosure crisis will see fewer properties going into foreclosure. If fewer properties go into foreclosure, the law of supply and demand will work to stabilize home values overall.
It is possible that more investigations and litigation will root out similar conduct of these banks in other communities, or that the practices of other banks will come under greater scrutiny. With just one bank, Wells Fargo, litigants suing the bank located former employees who said that bank staff referred to subprime loans as "ghetto loans" and African Americans as "mud people." As in Memphis and Shelby County, the City of Baltimore has sued Wells Fargo using these allegations, and others, to support the case that the bank engaged in discriminatory practices in that city as well. That case has passed the early stages of the litigation and the plaintiffs are reviewing bank records to determine if there is more evidence that can support what the former employees said about the atmosphere at the bank during the housing bubble. Could similar cases arise in other jurisdictions? Here's one: in the New York City metropolitan area, a study by the New York Times showed that middle income, African American borrowers in the region were five times as likely to be steered towards subprime loans as whites of similar, and even lower, income.
The lesson from recent successes should be obvious. The DOJ and others pursuing claims of discriminatory mortgage pricing and practices should not rest on their laurels. These settlements should embolden law enforcement officials and private litigators to continue taking all actions necessary to expose and remedy the widespread discriminatory conduct that was present during the height of the mortgage frenzy. Doing so aggressively might just help brighten the slowly improving housing picture, and bring some stability to what has been, for at least the last decade, a very volatile housing market, one that was riddled with fraud and discriminatory practices. A full accounting of these practices is what is desperately needed, and those pursuing that accounting cannot let up now.