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.
Trial Notes
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.
__________
Questions.
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.
First off what is a row house?
Second I do not believe this company was racially discriminate they just discriminated against the type of property. And they certainly can not be blamed for causing street crime in those areas that is ridiculous. Furthermore if this company is guilty of violating the Fair Housing Law then so are the rest of the banks out there who refuse to finance on manufactured homes. I guess they would be discriminating us “white trash”, “hill billy”, “red necks”, living in the “boonies”.
I just agree with Mila’s words… there is no racially discrimination…
Great case study!
Hi Mila,
A row house is similar to what we think of when we use the word townhouse here in the Seattle area. If you do a google image search on the keywords Baltimore Row Houses you’ll see all kinds of pictures of them. Here’s more on the history of Baltimore and their row houses.
http://en.wikipedia.org/wiki/Baltimore
Readers,
There’s nothing wrong with a bank deciding to create a policy to not lend on a specific type of property such as row houses or manufactured housing….provided the bank’s policy does not result in racial discrimination or more segregated neighborhoods.
Regarding manufacutured housing, is the current policy resulting in more segregated neighborhoods?
I believe a lender does have the right to decide what kind of properties they will lend on. Some will not do condos or co-ops. This is not discrimination. How can you determine that a lenders decision to not finance a type of property created racial discrimination or segregated neighborhoods. That would be very difficult to prove the ultimate cause. The lack of manufactured home financing has made it very difficult for seniors to finance their homes. I’m sure there is a greater percentage of seniors living in man homes than any other group. How is that different?
Did Novostar etc. engage in racial discrimination? I do not think so, it seems to me Novostar had a selected market where it decioded to do business and acheive its finanacial goals, and apparently that did not include the row houses in Baltimore.
In this particular case it might be perectly legal etc.but could also be construed as not very helpful in reducing Racial Discrimination Red Lining etc. Could it be found guilty of racial discrimination I belive it could if a really strong case was built agaainst it with massive public sentiment and the right legal magicians running the show.
I do not believe that Novostar engaged in racial discrimination. I believe that it is the lenders right to decide which types of property they want to lend on and which type they want to have in their portfolio.
I think it is true that a company that does not engage in racial discrimination can still be found in violation of Fair Housing laws. This is based on the fact (as stated above) that 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.
I believe, Property and credit risk goes hand in hand. An Investor looks at the performance of particular transactions and apply’s specific guidelines to reduce their risk. The last thing an Investor wants in their portfolio is non-performing, heavily concentrated in a row house, MFH, Condo development(s), etc. This is the cost of doing business and has nothing to do with ethnic origin. I would hope that an Investor has revisited the “Fair Housing Law”, prior to implamenting specific guidelines to specific property or they could be in violation of some paragraph of the law.
A real estate lawyer’s dream lawsuit. Technically, it would appear that Novastar is within it’s rights to establish lending parameters. On the other hand, is the “spirit of the law” and good public policy being served through what appears to be violations of several statutes? There is no easy answer to this problem. I do agree that seniors are being hurt through closure of lending avenues on manufatured homes and hopefully the country will come out of the current recession with a fresh look at how mortgage needs are being satisfied. Otherwise, look out for another government program.
It is very difficult to determine if it was discrimination or not. However I truly believe it was because it was specific to the kind of housing they wanted to ignore. They know darn well who is owning these type of homes in the inner city. A bank cannot discriminate who the loan is made to base upon the type of home. Unfortunately maybe I’m back on the other side it being the type of property. Look at manufactured homes and how they are avoided. In this case because of the many foreclosures facing us the investor could say they are only focusing on properties which are more likely to resale in a foreclosure market with the majority of buyers to purchase. This is why we have regulators and a Federal Court to sort this out. I think it would be very unwise for a bank to go upfront of any jury to decide a case. As the public sees it anyone from Wall Street is public enemy. Not a good time to be in front of a jury right now if you are especially a bank who received TARP funds.
Tough case. I guess you would have to see if Novastar allowed financing on row houses in other states besides Maryland. If they did then it could very well be discrimination but the fact that it was mixed use makes it difficult. Bell said that the program manual did not exclude row houses. As in many other lending guidelines lenders prohibit manufacture and log home financing. You would have to look at all loans Novastar did to find out if they actually excluded row home financing in every state.
About the statement regarding the landlord who does not let a large number of unemployed white people rent in a particular place. Not sure how that is a violation of the law, but I guess it is. If you go through a property management company they want their tenants to make 3 times the annual monthly rent payments. Show a most recent paystubs and tax returns. Their leasing requirements are almost as bad as getting a loan. (Or worse in the hey day of the NINA and SISA loan) if the tenant is unemployed they will not rent to them. I guess all of the tenants that did not qualify could probably sue because of fair housing. This is going on all over the eastside. I will say, the property management agencies did rent to prospective tenants if they had a bankruptcy and a current foreclosure as long as they could show they made 3 times the annual rent. In this case I am talking about the rent was $2,350 and the tenant had to make at least $84,000.00 per year in order to rent. (talk about great ratios).
I guess if you have a jury trial I think it is possible to found not guilty even if you did violate the fair housing law and I am sure it is possilbe to be found guilty even if you did not.
I don’t see racial discrimination in this, but fair treatment of all people is very important, so I don’t have a problem with this company being looked at very close. If you are not discriminating based on race prove it and move on.
Case Study NAACP v Novastar:
No the bank did not discriminate saying that they did not want to lend “their” money to purchase a certain type of home. It was not racially motivated it was financially motivated. If only more people where like them “Novastar” and had not granted money for buildings or projects that were failing assets then maybe I the tax payer would not have had to bail them all out… People in business need to stop being so PC and start calling a spade a spade… it was business not racial.
I feel the Lender has a right to decide what kind of property they choose to lend on. Its there money. How many lender choose not to lend on manufactured homes? Pretty much all of them. As long as they don’t discriminate there’s no issue here.
I am not sure if Novastar discriminated or not. I tend to think not. However, the problem is the NAACP is going after Novastar and other lenders in multiple states. Rather than empowering and educating african americans about the responsibilities and the benefits of homeownership in a grass roots community out reach, they choose to advance their social agenda in court. At the end of the day if all you have is a hammer, you will go look for some nails to pound.
I agree it is a difficult case. Lenders do have the right to determine which type of properties they will lend on. Is it discrimination when lenders will not lend to investors? It is very difficult to find a lender who will loan money to any investor who has more than 4 financed properties? Is it fair? It is called business. SFR investment properties have a high rate of foreclosures and the more properties the investor has the greater the risk of foreclosure. So is it discrmination? How is this different than a lender not lending on a condo, mobile or row house. I think it is the property type and not the person.
I read this case study again and again I come back to it sounds to me it was the property type. Row house have a higher rate of foreclosure and the lender is choosing where to lend their money.
I cannot see that Novastar actively engaged in RACIAL discrimination, but it’s obvious they discriminated in terms of property types.
Yes it is possible to engage in other types of discrimination according to the laws. If they discriminate based on age or disability that is also covered in the 1968 and ammendedments thereafter.
There is no secret that redlining is a tool that has been used by banks over the years to prevent lending in certain ethnic neighborhoods. Yes. Much like WAMU used infalted apprasial to pump value to make there portfolios look good. Novastar was in this community and decided that there was a apparent lending risk lending or row houses. The where very aware of the neighborhood and the residents they effected. To say they did is just not correct.
The Fair Housing Act has a prevision that states. It is enough to show that there action has a disproportionate effect on some group….even if this was not the intent.
These laws where wriiten in this tense because law makers are aware that certain inviduals will try to stretch the rule of fairness for there own purposes.
Here again we have this grey area coming into play. It’s unfortunate that companies have to be taken to task over there lending practices.
Remember many of the individuals living in the row homes had low LTV’s and adequate credit scores.
Redlining is illegal. No grey area there!
Hi Kelly: “It is very difficult to find a lender who will loan money to any investor who has more than 4 financed properties?”
Any lender can create any policy they want. Consider the purpose of the corporation: To make money for its shareholders….within the bounds of the law.
So lenders can have any policy they want; as long as the follow the law.
This includes Fair Lending/Fair Housing.
So the question them becomes, is limiting loans to investors or loans on manufactured housing creating more segregated neighborhoods?
NAACP is arguing that the EFFECT of Novastar’s policy creates more segregated neighborhoods.
The law doesn’t care what your good intentions are. What matters is the EFFECT of the lender’s policy.
I do not believe the discrimination was racially motivated but property type. The value of manufactured homes and row houses as defined in Baltimore do not hold the value as well as other property types. Lenders see this as business strategy and REO. I DO believe this inadvertenly creates segregated neighborhoods and in this case, in particular, with people of color. The bigger issue of segregation is created by economic status and opportunity. As we go through the rash of foreclosures/(neighborhoods) now and still ahead of us, the color distinctions will be more broad and at any age catagory of adulthood. Unemployment and economic hardship includes a broader group now than I have ever know it to be, so the segregation will resemble more of an economic nature than just race segregation. So how will the Fair Lending/Fair Housing Act work as the face of economic hardship changes? I see it becoming even more challenging.
I do not believe that they discrimated. They simply put a restriction on the type of housing they would lend on. I do not see this a violation of the fair housing laws.
Hat tip to ArdellD http://www.twitter.com/ardelld for finding this picture of a rowhouse on Zillow for us:
http://www.zillow.com/blog/norah-jones-in-a-fight-for-windows-on-her-townhouse/2010/01/08/
You can also see row houses in Baltimore toward the very end of the movie Red Dragon. Great movie from aways back staring Anthony Hopkins, Ralph Fiennes, Emily Watson, Harvey Keitel, Mary Louise Parker and Edward Norton. This rated R movie is a prequel to Silence of the Lambs.
http://www.imdb.com/title/tt0289765/
With my lending experience this is definately RED LINING, that is why the Mortgae Companies ie; Nova Star and Bell South shoud of had there loan officers calling on Realtors and other non traditional sources of business for one specific reason to document they are lending ther. In this case its obvious they aren’t interested.They should have some of there products FHA, Conf Conv etc removed from there origination base for income and I quarntee they would change their professional platform lending quickly.
Questions.
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.
Yes, I think it was so obviously Novastar engaged in a racial discrimination, absolutely. “…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”. Also, they discriminate the property types which is viloted the law of Fair Lending/Fair Housing.
Did Novastar engage in racial discrimination?
A: Even though I don’t think that was their intent, I believe Novastar is quilty based on how the Fair Credit laws are written. Row housing (accroding to this lawsuit)is predominately made up of african-americans, so denying funding on those simply because it is row housing makes them guilty. Especially given the fact that their own guide doesn’t specifically say they won’t fund on row housing.
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?
A: Yes, as explained above. May not be their intent but the consequences of their actions proved to be discriminative by nature.
Did Novastar engage in racial discrimination?
I do not believe that Novastart engaged in racial discrimination, since they clearly demonstrated that Row Housing imposes a higher risk, otherwise any lender today not wanting to finance Manufactured Homes or limit Condo’s could be subject to the same lawsuit. But the ruling may still go against them since this restriction signigicantly impacts a minority.
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?
Yes, if a neutral decision has an adverse impact on a group protected by HMDA then they can be in violation of Fair Housing
I do not feel that Novas Star engaged in racial discrimination. It is there right to lend on what ever types of proepty they feel like as it is there money. Just like now if I have an applicant wanting to purchase a manufactured home I simply let them know that at this time I do not financing available for manufactured/mobile homes and direct them to several different lenders I knowe that do. 🙂
Hi Gina,
Yes, it’s a lender’s choice on what type of property they’d like to have as collateral….provided they are not violating fair housing laws.
Is the present problem of lack of financing for manufactured homes creating more segregated neighborhoods?
I think is is more that the manufatuctred homes do not nearly appreciate like other proeprty types and with the declining market property values it has effected mobiles and manfucatured homes more. This is just my opinion. 🙂
Did Novastar engage in racial discrimination?
A. Based on the current law and it’s verbiage, the answer I feel is Yes they did discriminate. I do not beleive they ment to and would not have awarded any huge damamges. but there was discrimination. They could have required several layers of protection above an beyond the normal guides to ensure that the Row housing was not being used for anything beyond housing rather than lay down a unilateral denial of that type of housing. . .
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?
I beleive it is as noted above. I do not beleive NovaStar meant to do anything wrong, but I feel they did.
Your question is did Novstar engage in racial discrimination? Based on the details provided, I do not feel they did. It does appear they may have walked a fine line within the Fair Housing Laws. According to the Fair Housing Laws within the mortgage lending: no one may take the following actions basedon race, color, national origin, religion, sex, familial status or handicap:
Refuse to make mortgage loan
Refuse to provide information regarding loans
Impose different terms or conditions on a loan
Discriminate in appraising property
Refuse to purchase a lona or
set different eterms or conditions.
If the investor/broker decides to not lend on specific type of housing, that is within their right. Many times the loan is turned away by description of collateral prior to any telephone or in person applciation or interview for the loan.
I do not believe they intentional discriminated. It did not say they would not offer a loan on a refular SFR or another property. If a lender decides all Pink home have a bigger forclosure rate it is their right to avoid those home. It is unfortunate that one group of people chose to move into that neighborhood, but they said no home loans on Row homes across the board, didnt say what color you were, just specific to the style of home. We are doing that now with manufactured homes.
I believe they could be in violation of the federal Fair Housing Act. I dont think it is intentional but if only one group of people are drawn to a certian type of home or neighborhood, not lending on that style of home is a form of discrimination.
A bank is responsible to set forth limits to sustain it and make sound business decisions. I do not think Novastar was in the wrong. The would-be row house owners had the ability to seek approval at any lending institution they wanted.
If racial discrimination is not the intent I do not feel the business should be liable if proof the reasoning behind the action is fundamentally essential.