Raymond H. Brescia* , Visiting Professor of Law, Albany Law School
Subprime Communities: Reverse Redlining, the Fair Housing Act and Emerging Issues in Litigation Regarding the Subprime Mortgage Crisis originally appeared in the Albany Government Law Review and is available at 2 Alb. Gov’t L. Rev. 164 (2009).
As the nation struggles to find its bearings in the current financial crisis and venerable pillars of Wall Street crumble, hundreds of billions of dollars will be spent to shore up the financial system and re-capitalize credit markets. The spark that lit the blaze was the collapse of the subprime mortgage market, a daisy chain of inflated assets, speculative fervor, investor exuberance and unregulated and unchecked excess. While the eyes of Washington are directed toward Wall Street, there is much talk of the need to prop up Main Street as well, and nowhere is this more apparent than in communities and neighborhoods across the United States that have felt the first wave of the financial crisis hit: home upon home of foreclosed properties, abandoned and neglected, their hollow silence hard to ignore.
Many of these communities are communities of color. Lured by the temptation of credit, an economic necessity all-too-often denied such communities in the past, many found themselves saddled with unaffordable loans and backbreaking debt. Much of the rise in the homeownership rate in the United States over the past ten years was fueled by a rise in that rate among African-Americans and Latinos, a product of the expansion of the subprime mortgage market.1 As a result, as many subprime borrowers fall into delinquency and foreclosure, since a disproportionate share of such loans were made in communities of color, a disproportionate share of the foreclosures will also fall on such communities. With that will come a parade of harmful consequences: abandoned homes, reduced property values, increased crime and a loss of equity and assets.
Municipalities across the United States are trying to develop effective responses to the fallout in their communities from the collapse of the subprime mortgage market, funding housing counseling programs and foreclosure mediation and regulating the maintenance of foreclosed and abandoned homes.2 Another intervention that may prove promising is the prosecution of affirmative civil actions, designed either to punish lenders who allegedly engaged in discriminatory subprime lending practices or those failing to maintain their portfolio of foreclosed homes. A case of the first type has been filed in Baltimore;3 cases of the second type have been filed in Cleveland and Buffalo.4
In some ways, these cases are innovative. They are brought by cities, rather than individual borrowers, to rectify or mitigate the harms caused by subprime borrowers in those cities’ constitutive communities. In others, they are consistent with efforts of private actors to bring such litigation in this and other contexts.
This article is an attempt to assess the challenges faced by litigants, including municipalities, when bringing actions to remedy acts of past discrimination in the subprime mortgage market. The first case brought on behalf of a municipality as a whole was filed in early January 2008, by the Mayor and City Council of Baltimore, to remedy the impacts of what is alleged to have been discrimination in subprime lending within city limits.5 Baltimore, whose low- and moderate-income communities of neat row houses owned by working class homeowners have been ravaged by foreclosures generated by unaffordable subprime loans, has sued the largest lender in the Baltimore market, Wells Fargo, alleging racial discrimination in the marketing and selling of subprime home mortgages.6
This article reviews some of the emerging issues in discrimination law, as there is a growing body of lawsuits directed at “reverse redlining,” the practice of targeting borrowers of color for loans on unfavorable terms.7 As the following discussion shows, courts are struggling with the problems posed by reverse redlining and the challenges it raises to existing anti-discrimination jurisprudence. A first wave of cases was filed in which allegations of reverse redlining were raised, and the courts’ handling of such cases attempted to develop a new approach to such allegations, one that departed from existing anti-discrimination approaches to lending discrimination in some significant ways. A second wave of such cases, detailed below, appears to utilize, effectively, existing anti-discrimination jurisprudence in assessing the legality of reverse redlining practices. The argument central to this piece is that this jurisprudence is useful to combat reverse redlining, and litigants and the courts should learn well from this second wave of cases that have been successful in addressing the unique challenges posed by reverse redlining allegations. Although some tensions within anti-discrimination doctrine still exist, and these tensions are outlined in detail below, it is still the case that existing anti-discrimination frameworks are effective in combating reverse redlining and should be utilized to do just that.
This article is structured as follows: In Part I, I will describe the impact of the subprime mortgage crisis on municipalities across the country due to rising foreclosures and the increasing number of neglected and abandoned foreclosed properties within city limits. This section will conclude with an overview of the impact of subprime lending on communities of color. In Part II, I will describe the allegations and claims raised in the Baltimore litigation. In Part III, I will describe the state of the law with respect to the Fair Housing Act’s ability to address the extension of loans on disadvantageous terms to borrowers of color and other protected classes. In Part IV, I will assess emerging issues in anti-discrimination law with respect to the challenged lending practices, with a prescription for how courts can best address the Baltimore litigation and other, similar lawsuits that might be filed in the future, either by municipalities, state attorneys general or private litigants. Continue reading “Subprime Communities: Reverse Redlining, the Fair Housing Act and Emerging Issues in Litigation Regarding the Subprime Mortgage Crisis”