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The lights are on but nobody’s home

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Banks should not make discriminatory loans. Financial institutions are expected to extend credit to minorities on the same terms that they do with other, similarly situated borrowers. Banks are also encouraged to refrain from maliciously targeting minority neighborhood residents with loan terms that are worse than those offered to whites with similar credit credentials. These prohibitions matter: When banks engage in discriminatory conduct, their actions have profound financial consequences for marginalized communities and the cities that contain them. Unfortunately, a compelling body of evidence suggests that branches of Bank of America and Wells Fargo in South Florida breached these obligations during the subprime mortgage crisis.

On May 1, the Supreme Court allowed the City of Miami to proceed with a lawsuit against Bank of America and Wells Fargo, alleging that both financial institutions had engaged in discriminatory mortgage-lending practices. Specifically, the suit alleged that their lending practices resulted in disproportionate and excessive foreclosures on African-American and Latino homebuyers and significant financial harm to Miami. Bank employees were given financial incentives to offer African-American and Latino customers risky, high-interest loans because these mortgages carried higher commissions and brokerage fees, and they were processed quicker than safer loans. The banks saddled vulnerable, underserved minority borrowers with deceptive loans that featured exorbitant interest rates, high fees and severe pre-payment penalties that these homeowners could not afford.

What’s more, African-American and Hispanic borrowers were placed into predatory loans even though white borrowers with similar credit credentials were placed into prime loans. The disparities were especially pronounced for high-income bracket minority borrowers with satisfactory credit scores. For example: Among borrowers with an income over $100,000 and a FICO score of over 660 (indicating good credit), African-Americans and Latinos received a high interest rate loan over three times as often as white borrowers. Moreover, when default loomed, Bank of America and Wells Fargo refused to refinance minority loans while simultaneously refinancing similar loans issued to white borrowers.

Mid-level Wells Fargo and Bank of America management knew about – and encouraged – these discriminatory practices. Mortgage brokers were forced to sell a minimum number of risky, high-interest loans every month and lie about their client’s income, assets and employment records in order to meet these goals. One former Wells Fargo loan officer testified that the bank made a deliberate effort to target minority communities by hosting “wealth building seminars” with Hispanic Chambers of Commerce and African-American churches where African-American and Latino bank employees were forced to mislead undereducated and non-English-speaking attendees. White supervisors were apparently not permitted to attend these events because their presence would have spread suspicion among minority attendees. In any event, concerned employees were urged to worry about “putting food on the table,” rather than questioning bank policies. And Wells Fargo and Bank of America employees testified that their superiors altered mortgage records to prevent federal authorities from “giving them sh#%.”  

This was illegal. The Fair Housing Act forbids mortgage brokers from “engaging in … real estate transactions … that discriminate against any person … in terms or conditions … because of race.” Municipalities injured by discriminatory housing practices are permitted to file civil suits under the Fair Housing Act for damages. The banks predatory practices injured Miami because they (1) disproportionately caused foreclosures and vacancies in minority communities, (2) impaired the city’s racial integration and desegregation efforts, (3) decreased home values and reduced property tax revenues, (4) forced Miami police and fire departments to continually send first responders to address increased vagrancy, gang activity and fire-related problems in blighted communities and (5) compelled the city to hire more independent contractors to remove excess vegetation, haul away debris and remove graffiti from vacant properties.

The banks contend that Miami has no case, because the Fair Housing Act does not protect a city’s interest in constant property tax revenue and low municipal expenses. Bank of America and Wells Fargo’s response is unavailing, however. The Fair Housing Act has been interpreted broadly over the last 50 years to protect municipal interests in lost tax revenue, low city expenses and racial integration. The banks are out of luck.

 

 

Contact Habib Olapade at holapde ‘at’ stanford.edu.