Novastar and its mortgage broker Bell South Mortgage (Bell) conspired to maintain a policy of denying all loans secured by row houses in Baltimore and discouraged the referral of such business. Over a period of time, HUD sent shoppers to Bell/Novastar who were repeatedly treated differently based on protected characteristics of race, color, racial composition, and national origin. Property type is strongly correlated to the racial composition of neighborhoods in Baltimore. Two thirds of all row houses in the city are occupied by African Americans.
As a result of this policy, individuals in the community were denied equal access to credit, capital, banking services and loan products; and made housing unavailable on a prohibited basis, a clear violation of Fair Housing law. Loan officers repeatedly told shoppers, “We don’t do row houses.” In some cases Novastar and Bell refused loans where the borrowers had more than adequate credit scores, income, financial stability and even low LTV ratios.
When Bell joined with Novastar it was given a Company Program Manual listing Unacceptable Property Types. Row houses were not listed. Bell also secured an exclusive warehouse credit line from Novastar, agreeing that Novastar would fund all of Bell’s loans. At the time, Bell had several unclosed Baltimore row house loans, which Novastar refused to fund, and warned that using another warehouse line to close those loans would be a violation of their exclusive warehouse agreement. Bell assigned the loans to another lender for a fee. Bell and its staff continued to refuse loan applications on row houses in Baltimore even after being informed that this was a violation of Fair Housing laws.
Plaintiffs sought injunctive relief as well as money damages, cease and desist orders, attorney’s fees, and enjoining Defendants to modify their lending practices to comport with the law.
The N.C.R.C. and N.A.A.C.P. in their COMPLAINT claimed the following:
I. Defendants policies and practices violated the provisions of the Home Mortgage Disclosure Act by redlining: refusing to grant credit in a community or neighborhood. Their actions have had a disproportionately adverse effect on African Americans and other people of color compared with Caucasian applicants by virtue of denying the financing of the type of property chosen for security purposes. This contributed to the economic destruction of a Baltimore neighborhood, depreciation of property values, higher foreclosure rates, street crime and the creation of housing ghettos.
II. Defendants policies and practices violated The Civil Rights Act of 1964, which prohibits racial discrimination in the formation and issuance of contracts, and intentional interference to pursue and hold real property. Defendants through their willful conduct contributed to racial hatred, and denied African Americans the right to own property.
III. Defendants policies and practices violated the provisions of The Equal Credit Opportunity Act which prohibits a creditor from discouraging an applicant from making application for credit by refusing to consider the security property offered.
IV. Defendants policies and practices, through the disparate impact theory, a provision of The Fair Housing Act and other legislation by imposing different requirements or conditions on a loan on the basis of elements other than credit, the result of which was racial discrimination.
Before the trial was held, Bell asked the judge for summary judgment, claiming it was only following the dictates of its “exclusive source of warehousing and funding.” Its agreement required that all loans must be sold to Novastar thus it had no other choice. At trial Novastar raised an unusually large number of issues with respect to the wording of the law, citing numerous cases and questioning the interpretation and meaning of whether or not the law applied to this case.
The lenders denied the accusations and set out these AFFIRMATIVE DEFENSES
I. Type of property. Independent appraisals show that row house properties in Baltimore are in a transitional state. Many are being converted to commercial or mixed-use enterprises. This, not lack of financing, has resulted in value depreciation. Our Company Program Manual at ¶5.3 Unacceptable Property Types reads: Commercial use or a mix of commercial and residential properties. Clearly, many row houses in Baltimore are “mixed use”, as most appraisals point out. This violates our written policy, which was not drawn frivolously. Empirical evidence we have provided demonstrates that losses on this property type exceed those of other type of dwellings. As further evidence of excessive risk, private mortgage insurers have refused to insure loans on row houses.
II. Intentional Interference. We have shown that there are other mortgage lenders in Baltimore and elsewhere that offer financing to row house buyers. We fail to see how our actions prohibit borrowers from shopping the mortgage market for other sources willing to accept this type of security. Our Company Program Manual at ¶2.3 Regulatory Compliance reads: We comply with all federal and state regulatory requirements in granting mortgage loans. We have provided the court with a recent pipeline and portfolio report showing that a large number of our borrowers are African American and other minorities and the security properties are located in a variety of neighborhoods, towns, and rural areas . We fail to see how our conduct in these cases intentionally interfered with these borrowers right to contract for the property desired.
III. Discouraging Applicants. We have shown a number of examples where national mortgage lenders regularly publish U. S. Postal zip codes showing geographic areas in which they will not grant credit. These typically are areas where lending experience has shown that unreasonable business risks have been found through empirical evidence. We ask the court: How does this differ from avoiding row housing? We believe we should have the same right to define when, to whom, and where we will grant credit without the interference of government and claim this right specifically in this case. We deny discouraging borrowers from applying for credit because in every case cited we informed the borrower of our willingness to finance real property in many other locations.
IV. Racial Discrimination. Refusing to accept real property offered as security for a loan is not against the law. The decision to lower lending risk profiles and elect not to finance row houses is racially neutral – it is not directed toward any race –- it is directed toward real property and therefore cannot be found racially discriminatory. As an example of our neutral policy we refer to our Company Program Manual, at ¶6.2 Minimum Value Requirements. There is no minimum value requirement for Citizens and Resident Aliens with our company because we long recognized that this is discriminatory by its very nature. (Non-resident aliens and piggybacks are limited to $75,000 because of secondary market considerations not internal company policy). We have provided the court with example after example of lending companies that have loan minimums whose adverse and disparate effect is directly similar to the case at hand. We will make mortgage loans other companies refuse because we understand the need for making capital available in large or small amounts – a racially neutral policy. We contend that minimum loan amounts are also discriminatory but counsel can find no case in the court’s jurisdiction where lenders have been challenged under civil rights statutes.
Mentioned in this suit is the fact that lenders have been sued by several cities using two theories of “Public Nuisance” In City of Cleveland v. Deutsche Bank Trust Company, et al. Common Pleas. January 10, 2008. The city claimed that lenders were the cause of high foreclosure rates, blocks of unoccupied residences that were more expensive to police and protect against fire damage and empty blocks of neighborhoods decreases property values and loss of revenue
Notes on the defenses raised:
I. Defendants provided audited internal data showing greater-than-average losses on row houses, together with an article from the Baltimore Sun newspaper, which reported that some units in Baltimore’s row houses were being used as boarding houses and even Bed & Breakfast Inns, in violation of the zoning laws. Zoning violations are often considered a default in mortgage lending.
II. The pipeline and application data used were taken from published HMDA reports, and the Mortgage Bankers Association provided data on the number of foreclosures and average losses to member companies in the same geographic region.
III. Copies of advertisements and loan program brochures of other lenders provided information on zip code lending restrictions. It was and is a common practice. Plaintiffs did not refute it.
IV. The disparate theory holds that when an action has a disproportionate effect on some group (racial, ethnic, etc.) it can be challenged as illegal discrimination even if there was no discriminatory intent.
The question is whether someone who does not engage in racial discrimination can violate the federal Fair Housing Act. The claimant need not prove that individuals were treated differently because of their race. Instead, it is enough to show that a neutral practice has a disproportionate effect – that is, a disparate impact – on some racial group.
However, the theory is difficult to apply. Suppose a landlord refuses to rent to people who are unemployed, and it turns out that this excludes a higher percentage of whites than Asians. A white would-be renter could sue. It would not matter that the reason for the landlord’s policy was race neutral and had nothing to do with hostility to whites. He would be liable, unless he could show some “necessity” for the policy. This would hinge on whether he could convince a judge or jury that the economic reasons for preferring the rent to the gainfully employed were in some way essential.
Did Novastar engage in racial discrimination?
Is it possible for a company that does not engage in racial discrimination to still be found in violation of Fair Housing laws?
If yes, how so? If no, why not?
Here is a link to the Fair Housing Laws for your review.