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Disparate Impact and Fair Housing: Seven Cases You Should Know

Last week, the Obama administration formalized the legal standard it has used to enforce fair housing laws and hold banks accountable for discriminating against minorities. Here’s an overview of key cases from the foreclosure crisis.

Protesters gather at Wells Fargo headquarters in Los Angeles, March 20, 2012. Wells Fargo paid $175 million to settle charges of discriminatory lending, but denied any wrongdoing. (Photo by Kevork Djansezian/Getty Images)

Last week, the Obama administration formalized the legal standard it has used to enforce fair housing laws and hold banks accountable for their role in a foreclosure crisis that hit black and Latino homeowners the hardest.

The U.S. Department of Housing and Urban Development issued a regulation on disparate impact,” codifying a long-used legal precedent that says the Fair Housing Act prohibits practices that result in discrimination “regardless of whether there was an intent to discriminate."

After decades of being denied credit, many minority communities were victim to “reverse redlining” during the foreclosure crisis, as mortgage companies pushed risky loans in hopes of profiting from their higher interest rates and fees. With the disparate impact standard, the Department of Justice was able to argue that the disproportionate harm to communities of color put predatory lenders in violation of the Fair Housing Act and the Equal Credit Opportunity Act.

Now, the Supreme Court is considering hearing a challenge to the disparate impact standard. Some say HUD’s new guideline could be “the deciding factor” in whether the standard will withstand the Supreme Court’s scrutiny.

As housing officials and civil rights advocates keep their eye on the high court, we’ve rounded up seven key disparate impact cases you should know about.

United States v. Countrywide Corporation, Countrywide Home Loans and Countrywide Bank

Countrywide, a now-defunct mortgage company owned by Bank of America, gave subprime loans to 10,000 Hispanic and African-American borrowers, while providing prime loans for white borrowers with similar financial situations. (Subprime loans come with higher interest rates to account for a supposed higher risk of default.) A Bank of America spokesperson said the DOJ reviewed loans made before Bank of America purchased Countrywide in July 2008.

As we reported last week, the DOJ reached a $335 million settlement, the US’ largest fair lending settlement on record, using the disparate impact standard. Countrywide has not admitted to any discriminatory practice.

United States v. Wells Fargo

The DOJ case against Wells Fargo over violation of the Fair Housing Act is the second largest fair lending settlement in the DOJ’s history, after the lawsuit against Countrywide Financial. Brokers at the country’s largest mortgage lender were found to have raised interest rates and broker fees for more than 30,000 minority customers. According to lending data, African-American customers in the Chicago area paid on average $2,937 more in broker fees than similarly situated white customers. Hispanic borrowers were charged $2,187 more. Black and Hispanic homeowners also were encouraged to take on riskier subprime loans.

Wells Fargo agreed to a $175 million settlement in July, though the company denies any wrongdoing and says they settled to avoid a “costly legal fight.”

Adkins et. all v. Morgan Stanley

The ACLU, along with the National Consumer Law Center and the law firm of Lieff, Cabraser, Heimann & Bernstein, filed a lawsuit in October against Morgan Stanley claiming the financial services firm encouraged lenders to push high-risk mortgage loans on African-American borrowers. The case centers on Detroit, where from 2004 to 2006, African Americans were 70 percent more likely to receive a subprime loan than white borrowers with the same income and credit background.

The case was the first to charge the secondary mortgage market, and not just mortgage companies themselves, with violating the Fair Housing Act. The plaintiffs contend that Morgan Stanley encouraged now-defunct New Century Financial Corporation to sell predatory loans, which targeted predominantly black communities. Morgan Stanley profited by bundling and selling those loans to investors, allegedly knowing borrowers were likely to default.

Morgan Stanley filed a motion to dismiss the case at the end of December. Oral arguments are scheduled to be heard in March.

United States v. SunTrust Mortgage Inc.

The DOJ found that SunTrust Mortgage allowed its brokers and loan officers considerable leeway in determining a customer’s interest rate, resulting in discriminatory prices for minorities. They were charged with violating both the Fair Housing Act and the Equal Credit Opportunity Act in charging more than 20,000 black and Hispanic customers with higher interest rates and fees between 2005 and 2009.

SunTrust denied any wrongdoing, but settled for $21 million in May.

United States v. C&F Mortgage Corporation

The Justice Deptartment charged C&F Mortgage with violating the FHA and ECOA by raising interest rates for black and Hispanic mortgage customers. C&F did not require its loan officers to document reasons for changing a customer's interest rate from the standard rate, and increased compensation for loan officers who charged higher loan prices.

Though C&F denied allegations of discrimination, they settled for $140,000 and began reviewing employees' compliance with nondiscrimination standards, specifically their justification for large interest rate adjustments. The company also agreed to institute new pricing policies and employee training policies.

Greater New Orleans Fair Housing Action Center et. all v. HUD and Paul Rainwater, Executive Director of the Louisiana Recovery Authority

In 2008, New Orleans housing organizations and local homeowners accused HUD and the Louisiana Recovery Authority of discriminating against black homeowners in the aftermath of Hurricanes Katrina and Rita. The Road Home program was supposed to provide storm victims with funding to rebuild their homes, but based their compensation on their house’s original value rather than the cost of damage. Houses in black neighborhoods that were identical to houses in white neighborhoods were given far less money to rebuild. 

In 2011, HUD agreed to pay roughly $62 million under a new Blight Reduction Grant Adjustment program. The funding will serve 1,460 eligible homeowners in four parishes that suffered the most damage.

United States v. PrimeLending

The Department of Justice found that PrimeLending regularly set higher loan prices for African American borrowers. As one of the country’s biggest Federal Housing Authority lenders, PrimeLending provides mortgage loans to low-income customers that are guaranteed by the FHA or the Department of Veterans Affairs. PrimeLending incentivized increasing “overages” (higher interest rates) by providing higher compensation for loan officers.

The mortgage company settled for $2 million in 2010, and set new loan pricing policies and employee training requirements.

Keep up with our investigations by following us on Facebook and Twitter, or read more about the Fair Housing Act, and how the government betrayed a landmark civil rights law

Correction: An earlier version of this story incorrectly referred to brokers instead of loan officers in the cases involving C&F and PrimeLending. In the case involving SunTrust, the story has been updated to include loan officers as well as brokers.

I am a confirmed atheist:-
The Islamist system is too good to be allowed to exist. When a home is required the loan is applied for and if the selected house is up the Islamic banks assessment the loan is granted.One major difference is that they do NOTcharge interest and therefore, a home valued at say, 150,000 at the time of borrowing will be 150,000 when paid for in as many years as it takes to repay.  Selling price of the 150,000 house may be 250,000 which belongs to the borrower and not the bank. Therein lies much of their retirerment earnings. This method also ensures that the borrower, home owner, takes care of his house investment, but with the interest money saved, the house maintenance is not too burdonsom.
Investigate the muslim financial system and get your own back.

(Not the other guy, the usual one who rambles.)

John, what does that have to do with disparate impact?  And other than shifting around terminology to avoid the word “interest,” what do Muslim banks do different than any other bank?

Seriously, I tried to read up on it after hearing about it in a few places, but if you look at the numbers, you end up with a recurring service fee that’s proportional to the amount borrowed.  That’s interest by every practical definition of the word.  If there’s a difference, it seems to be in the management (i.e., that they won’t throw someone out on their ear for a late payment because a computer says to foreclose), not in their methodology.

I’d be willing to bet that the effect varies with the size of the bank, not the religion of the founders.  A bank that doesn’t extend outside its local community is responsible to that community.  A global aggregate bank on the stock exchange is responsible to the stock price.

what is your definition of broker?..... these cases involved retail mortgage bank originators here…. Prime, Well, C& F, etc…

I am the Government Affairs Chair for NAMB, the trade association for mortgage professionals. Please contact me to discuss.

Thank you

john

So, they claim discrimination when lenders won’t lend give them mortgages and then they claim discrimination when lenders do give them mortgages? What exactly do you want? During the lending boom I could have gotten a mortgage for a $3 million house. I didn’t because I knew it was a risky purchase. It isn’t the lenders job to advise you on how much you should borrow. I am sure that if a lender told a black guy that he can’t get a mortgage because he might not be able to afford the payments the lender would be at risk of a discrimination claim.

This article is part of an ongoing investigation:
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Segregation Now: Investigating America's Racial Divide

Investigating America’s racial divide in education, housing and beyond.

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