Racially “targeting” predatory subprime loans? The NAACP and Baltimore suits

by Ted Frank on January 12, 2008

Cross-posted from Point of Law.

Says the NAACP complaint: “In 2004, African-American homeowners who received subprime mortgage loans from Defendants were over 30% more likely to be issued a higher-rate loan than Caucasian borrowers with the same qualifications.” (¶ 1.) Thus, it concludes, the disparity “result[s] from a systematic and predatory targeting of African-Americans.” (¶ 6.)

Similarly, Baltimore’s suit argues that Wells Fargo is more likely to foreclose in African-American neighborhoods—and that suit does not even attempt to adjust for similar qualifications or finances, just alleging racial disparity.

Of course, there is a difference between being targeted for a subprime mortgage loan and accepting a subprime mortgage loan. And I don’t believe that African-American homeowners were targeted for subprime mortgage loans because they were African-American. They were targeted because they were homeowners.

Between 2001 and 2005, I was a law-firm associate, high-income, making multiples of what I make today at a thinktank. And, like I am today, I was also white. And the minute my adjustable-rate mortgage was registered in the title books in 2001, I got several solicitations a week in the mail from fly-by-night mortgage brokers offering to refinance my mortgage with ludicrous financial products. (And when I made the mistake of investigating on-line options for switching to a fixed-rate mortgage in 2004, I also got several e-mails a day and phone-calls a month on the same basis to the point that I switched e-mail providers.)

Somehow, I resisted refinancing with a mortgage that was not favorable to me in the long run—I took a 5.25% fixed-rate instead. But I sure was targeted with subprime opportunities, especially as the real-estate prices in my neighborhood skyrocketed about 10% a year. And if, with my skin-color, income, education-level, and impeccable credit-score, I was targeted, so was every homeowner and their grandmother.

To the extent a statistical study says minorities were, ceteris paribus, more likely to receive unfavorable mortgages than whites, the study reflects a specification error, perhaps in failing to account for different levels of consumer education. Another possibility: there is a lot of state-by-state regulation of the mortgage industry. Are subprime mortgages more likely in states with high minority populations, for example? Are subprime mortgage brokers more likely to be aggressive in urban areas in states on the coasts where real estate prices were increasing faster than average, and those states correspond to states with high minority populations?

Note that the CRL study that has been driving the debate and highlighted in the NAACP suit finds that for many types of loans, whites were “disadvantaged” relative to Hispanics, which would seem to count against a racial explanation (unless one believes that bankers hold a racial animus against whites and towards Hispanics) and more towards a geographic explanation.

Note also the irony that these same defendants were accused of failing to offer loans to African-Americans just a few years ago. (See also Apr. 1.)

Finally, note that the NAACP complaint is legally frivolous in at least one respect because of the lack of standing in a federal court. Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470 (2006) (no § 1981 standing for third parties). (Baltimore brings no § 1981 claim.) Fair Housing Act standing is questionable, too, given the lack of allegation of injury to NAACP in particular, though that could be fairly easily rectified by an amended complaint, especially in the Ninth Circuit. Cf. Spann v. Colonial Vill., Inc., 899 F.2d 24 (D.C. Cir. 1990) (“[a]n organization cannot, of course, manufacture the injury necessary to maintain a suit from its expenditure of resources on that very suit”) (R. Bader Ginsburg, J.); Fair Housing of Marin v. Combs, 285 F.3d 899, 902 (9th Cir. 2002). N.B. that there is an amended version of the NAACP complaint that may already fix these issues. NAACP v. Ameriquest Mortgage Co., No. 8:07-cv-00794-AG-AN (C.D. Cal.). For some reason, this is not available on PACER, so I haven’t seen it.

Related: Jan. 8 (Krauss on Baltimore suit); Apr. 25 (me on third-party liability for subprime lending).

(Disclosure: I own less than $15,000 in stock in Citigroup, one of the defendants in the case.)

{ 9 comments }

1 DLM 01.12.08 at 2:31 pm

So long as Wells Fargo has a contractual right to foreclose, what possible difference does it make if it does so more frequently in the case of black borrowers? In other words, what legal harm can one suffer (or a sity, for that matter) from a foreclosure that is fully justified by the underlying loan agreements?

Frankly, the idea that someone at Wells Fargo has decided to tip the scale in favor of forceclose for blacks (but not other races) seems utterly implausible on its face. But of course, that doesn’t stop plaintiffs from wasting everyone’s time with baseless lawsuits.

2 Tracy 01.12.08 at 6:54 pm

DLM, the point the city is making is that Wells made loans in black neighborhoods that were more likely to result in forclosure then in white neighborhoods (they were careful not to outright say black/white customers). They claim those loans had higher fees and worst rates. This is were the arguement falls short, as it doesnt take into account that the majority of the gentrified neighborhoods (those with wealthier residents) are white, and that skews the results. Additionally, they completely disregard the fact that the risk based pricing model that lenders use has no place for race.

As for standing, they are claiming that the city has been deprived of property tax revenues due to forclosures. Additionally, they claim that there are additional fire and police cost incurred by abandoned homes and they want to recoup this cost.

I personally find it hilarious that this comes just a decade or so after lawsuits claiming lenders were refusing to lend in those same neighborhoods. My guess is lenders are going to start pulling out of the city (ask WV what happened out there) because they dont want to subject themselves to potential lawsuits.

3 nevins 01.12.08 at 8:34 pm

When on board an airplane it is a fair assumption that no one else on that flight paid the exact same amount that you did. The airlines will try to get the highest amount from each person that they think they can. If members of a particular class or group consistently accept higher rates does that make them 1) wealthy enough that they don’t look hard for a good price, or 2) financially unsophisticated enough that they don’t look for a good price?
The outcome cited, that minorities are offered higher interest rates probably means that minorities have taught lenders that it is financially savvy to offer higher rates because minorities will accept them (being financially less savvy).
This is not racism, just business. Even practices blind to race can have disparate impact if groups behave consistently in a manner contrary to their own best interest.

4 Todd Rogers 01.12.08 at 10:44 pm

Leaving the merits of the above posters’ arguments aside, I can’t tell if you both forgot to use “[sic]” a time or two…the letter “c” is sort of close to the letter “s” on the keyboard but c’mon…you have to be kidding me! Hardly perfect am I but am I missing something here?

5 bob neal 01.13.08 at 6:42 am

And the result is all of us will pay higher rates to make sure those with less than perfect credit don’t feel discriminated against.

And since when is a government entitled to appreciation of property to the point it can sue for a loss? I guess cities should be able to sue each time a business closes? Or maybe a city can force a developer to build sooner b/c it wasn’t the benefit of higher taxes on the property?

6 DLM 01.13.08 at 12:12 pm

Todd Rogers,

Obviously, “sity” was a typo. I hope you did notlose any sleep over it.

7 Karl 01.14.08 at 8:29 am

I am still awaiting the journalistic coup de grace against these named “predatory” lenders that should lead to a pulitzer prize for the factual portrayl of the alleged misdeeds. To date it seems that there are only anecdotal snippets involving minute segments of the mortgage market that are manupulated and distorted. what % of these home are non owner occupied? what are avergae FICO scores BEFORE and AFTER the foreclosure? HOW much debt was incurred after the mortgage was taken out. what are the names of the attorneies and title companies that forced these people to sign? now you have the basis for some real journalism….

8 Tracy 01.14.08 at 10:00 am

You arent kidding Karl. The articles in the Baltimore Sun that have been in support of these suits tell stories about people who, after taking the mortgage, lost their jobs, and then lost their homes. Now, I don’t know about you, but if I lost my job for an extended period I would be unable to pay my mortgage too. These stories play on the sympathy of a potential juror, but are completely irrelevant to the lawsuit.

9 Anonymous Attorney 01.14.08 at 10:19 am

Alas, Karl, I doubt any journalists will peer as deeply as you describe. That’s because charges of “racism” are generally taken at face value by the press. Even when, as here, it’s a little absurd to consider that, as other posters note, banks used to be called racist for DOING THE EXACT OPPOSITE.

Ahem.

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