Redlining Cases in 2015 And A New Discrimination Standard

Limited access to mortgage credit for credit-impaired and low- and moderate-income (and, therefore, disproportionately minority) borrowers has become a significant public policy challenge in the post-financial crisis era. There are many reasons for this problem. Among them are mortgage lender retreat to qualified mortgage (QΜ) loans out of fear of the consequences of loan default, lender aversion to use of the Federal Housing Administration (FHA) program due to the aggressive efforts of the U.S. Department of Housing and Urban Development and U.S. Department of Justice to seek to recapture (through the False Claims Act or an indemnification) insurance payments on defaulted FHA loans, and hard-nosed repurchase demands by Fannie Mae and Freddie Mac. To make matters worse, precrisis lender efforts to better serve these borrowers, even efforts arising out of initiatives of housing activists, were later attacked as “reverse redlining” and “targeting” by advocates, municipalities and even the DOJ.

In the absence of a carrot — a profitable way to serve this market — the federal agencies with responsibility for enforcing the fair-lending laws — the Consumer Financial Protection Bureau, prudential banking regulators, DOJ and HUD — are seeking to pressure lenders to make more loans to minority borrowers by using the “stick” of enforcement activity. The agencies are misapplying the disparate impact discrimination standard recently affirmed by the U.S. Supreme Court for limited use in connection with the Fair Housing Act.

Originally published by Law360; reprinted with permission.