Supporter of a moratorium on foreclosures in Michigan standing outside a home that exploded on Lee Place near Woodrow Wilson on Detrot's west side, May 5, 2008. The home had been foreclosed. (Photo: Alan Pollock).
Originally uploaded by Pan-African News Wire File Photos
Justice Dept. Fights Bias in Lending
By CHARLIE SAVAGE
New York Times
WASHINGTON — The Justice Department is beginning a major campaign against banks and mortgage brokers suspected of discriminating against minority applicants in lending, opening a new front in the Obama administration’s response to the foreclosure crisis.
Tom Perez, the assistant attorney general for the department’s Civil Rights Division, is expected to announce Thursday in New York that the administration is creating a new unit that will focus exclusively on unfair lending practices.
“We are looking at any and every practice in the industry,” Mr. Perez said in a recent interview.
As part of an expansion of the Civil Rights Division approved by Congress last year, the Justice Department is hiring at least four lawyers and an economist for the new unit, while about half a dozen current staff members will transfer into it.
Mr. Perez plans to formally announce the new unit at the “Wall Street Project” conference organized by the Rev. Jesse Jackson’s Rainbow/PUSH Coalition. He characterized the effort as a major turnaround, and criticized the previous administration as failing to scrutinize lending practices amid the subprime mortgage boom.
While past lending discrimination cases primarily focused on “redlining” — a bank’s refusal to lend to qualified borrowers in minority areas — the new push will instead center on a more recent phenomenon critics have called “reverse redlining.”
In reverse redlining, a mortgage brokerage or bank systematically singles out minority neighborhoods for loans with inferior terms like high up-front fees, high interest rates and lax underwriting practices. Because the original lender would typically resell such a loan after collecting its fees, it did not care about the risk of foreclosure.
It is a rarely used theory, and it carries political risks. Some critics have contended that government rules pushing banks to lend to minority and low-income borrowers contributed to the financial meltdown. The campaign could rekindle that debate.
“They encourage lenders to make risky loans for reasons such as diversity, and then when lenders have a problem because they made too many risky loans, they condemn them for that,” said Ernest Istook, a fellow at the conservative Heritage Foundation and a former Republican congressman from Oklahoma.
Still, Mr. Istook emphasized that he was “not defending anybody who engages in wrongful redlining practices.”
A representative of the Mortgage Bankers Association, the lobbying arm of the real estate finance industry, did not respond to a request for comment.
Under federal civil rights laws, a lending practice is illegal if it has a disparate impact on minority borrowers, and the Obama administration is signaling that it intends to make the enforcing of fair lending laws a signature policy push in 2010.
The division has already opened 38 investigations into accusations of lending discrimination. Under federal lending laws, it can seek compensation for borrowers who were victimized by any illegal conduct, as well as changes in a lender’s practices.
John Relman, a housing lawyer, said there was plenty of evidence that some banks violated fair housing laws during the subprime boom.
Mr. Relman has helped the Cities of Baltimore and Memphis sue Wells Fargo over the costs taxpayers incurred because of foreclosures. As part of those lawsuits, he obtained affidavits from former Wells Fargo loan officers who said the bank had systematically singled out minority borrowers for high-interest, high-fee mortgages, bypassing its own underwriting rules. The State of Illinois has also sued the bank.
Wells Fargo has denied any wrongdoing. Last week, a judge dismissed Baltimore’s lawsuit, saying there were too many other causes of the damage to inner-city neighborhoods to blame the bank. Mr. Relman said the city intended to file a new complaint that focused more narrowly on recouping costs associated with specific properties.
But it is much easier for the federal government to sue banks like Wells Fargo. Mr. Relman said he hoped the Justice Department decided to join the cases.
“Not only would we welcome them; we encourage them to get involved,” Mr. Relman said. “It’s long overdue.”
Mr. Perez has hired Eric Halperin as a special counsel for fair lending. Mr. Halperin, a career lawyer in the division from 1998 to 2004, is currently the Washington director and head litigator for the Center for Responsible Lending, a nonprofit group that focuses on financial products it deems predatory.
The division has also gained access to data the Treasury Department is collecting from banks about loan modifications for people seeking to avoid foreclosure. It intends to search for signs of any disparate impact on minorities.
The Justice Department is also working with several state attorneys general who have taken an interest in bringing potential lawsuits over banks’ subprime lending practices.
Richard Cordray, the attorney general of Ohio, said federal and state officials were sharing information and helping one other develop potential legal theories about how to go after reverse redlining.
“We are looking at a common problem and a common pattern to determine what can be done about it,” Mr. Cordray said.
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