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 RedliningUnderwritingServicing Predatory Lending/Harassment (only if targeted at a protected class)

Recent FHA Fair Lending Cases U.S. v. AIG FSB and Wilmington Finance (2010) broker fee pricing (mortgages) 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) pricing (mobile home loans)

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 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

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

DOJ Redlining Cases DOJ Redlining Cases Failure to provide lending services to minority areas Few or no branchesFew or no branches Little or no marketingLittle or no marketing CRA assessment area excluding minority areasCRA assessment area excluding minority areas Extremely low proportion of loansExtremely low proportion of loans

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 no branches little or no marketing little or no marketing exclusion from the bank’s three exclusion from the bank’s three separate CRA assessment areas extremely low proportion of loans extremely low proportion of loans

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 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 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 (2009) Complaint alleged that from : Bank made only 218 of its 1563 mortgage loans (14%) in majority-minority census tracts 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) Comparable lenders made 31% of such loans in majority minority census tracts (twice as many) This difference is statistically significant This difference is statistically significant

United States v. First United Security Bank (2009) Complaint alleged that from : Bank made only 245 of its 2134 CRA small business loans (11.5%) in majority- minority census tracts 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) All lenders made 21% of such loans in majority minority census tracts (almost twice as many) This difference is statistically significant This difference is statistically significant

United States v. First United Security Bank (2009) Consent order filed with complaint includes: non-discrimination injunctionnon-discrimination injunction one new branch in a majority A-A areaone new branch in a majority A-A area training requirementstraining requirements affirmative outreach and marketingaffirmative outreach and marketing revised CRA assessment areasrevised CRA assessment areas

United States v. First United Security Bank (2009) Monetary relief: $500K in loan discount fund$500K in loan discount fund $110K for outreach$110K for outreach $55K damages for African-American$55K damages for African-American customers charged higher interest rates

DOJ Redlining Settlements All recent redlining settlements include: Nondiscrimination provisionsNondiscrimination provisions New branches in previously redlined areasNew branches in previously redlined areas Outreach & consumer educationOutreach & consumer education Training and changes to bank proceduresTraining and changes to bank procedures Monetary relief ranging from $3 to $10 million in loan subsidies for previously redlined areasMonetary relief ranging from $3 to $10 million in loan subsidies for previously redlined areas And the results…

United States v. Mid America Bank (2002) 2000: 4% of HMDA originations in majority-minority census tracts 2000: 4% of HMDA originations in majority-minority census tracts 2003: Consent Order entered 2003: Consent Order entered 2004: 12% of HMDA originations in majority-minority census tracts 2004: 12% of HMDA originations in majority-minority census tracts 2006: 14% of HMDA originations in majority-minority census tracts 2006: 14% of HMDA originations in majority-minority census tracts 2008: Consent Order terminated 2008: Consent Order terminated

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 minoritiesLarge percentage of loans made to minorities Specific marketing to minoritiesSpecific marketing to minorities Predatory nature of loansPredatory nature of loans

Reverse Redlining Must demonstrate that a defendant’s lending practices were: “unfair” or “predatory” and “unfair” or “predatory” and either intentionally targeted on the basis of a protected category either intentionally targeted on the basis of a protected categoryor that there is a disparate impact on the basis of protected category that there is a disparate impact on the basis of protected category

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 (E.D.N.Y. 2007)

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. Greenpoint Mortg. 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 Plaintiffs relied on statistical data about the prevalence of subjective risk-based pricing on minorities – more likely to receive: subprime loans subprime loans higher yield spread premiums higher yield spread premiums higher fees higher fees steered into less advantageous loan products steered into less advantageous loan products

Potential Applications of Reverse Redlining Theory Allegations of discrimination in: Mortgage fraud targeted at protected groupsMortgage fraud targeted at protected groups Reverse mortgage scamsReverse mortgage scams Loan modification scamsLoan modification scams

U.S. Department of Justice Civil Rights Division Housing and Civil Enforcement Section, NWB Jon M. Seward, Deputy Chief (202)