NAACP Subprime Discrimination Suit

We mentioned briefly last week that the National Association for the Advancement of Colored People (the NAACP) has filed a class action suit against more than a dozen subprime lenders in an effort to stop those lenders from engaging in what the suit calls "systematic, institutionalized racism in making home mortgage loans."

The suit is based primarily on the results of two studies. One was a report from the Center for Responsible Lending (CRL) that found that African-Americans were more likely - 31 to 34 percent - to be issued more expensive subprime loans than were Caucasians with equal creditworthiness and credit risk.

Then earlier this week, the National Community Reinvestment Coalition (NCRC) published a study that stated than lenders made high-cost subprime loans to higher-qualified African-Americans 54 percent of the time compared to 23 percent of the time to Caucasians, even when the latter group was less qualified.

The NAACP suit specifically names 14 lenders; Ameriquest, Wells Fargo, Fremont Investment, Option One Mortgage (H&R Block,) WMC Mortgage, Countrywide, Long Beach Mortgage, CitiGroup, BNC Mortgage, Accredited Home Lenders, Encore Credit (Bear Stearns,) First Franklin, HSBC, and Washington Mutual.

While much of the suit is based on the 2006 CRL study, the NAACP does make reference to the NCRC study which was released only days earlier. That study found that income levels did not protect minority borrowers from being disproportionally targeted by high-cost loans. In fact the study indicates that racial differences in lending increase with income levels. In other words, middle-and upper-income minorities are more likely to receive high priced loans than their similar white counterparts than are low-and-moderate-income minorities compared to their white counterparts.

African Americans of all income levels were twice as likely or more than twice as likely to receive high-cost loans as were whites in 171 metropolitan statistical areas (MSAs) in data collected in 2005; middle-to-upper income African-Americans had the same probability in 167 MSAs. However, lower-to-middle-income African Americans were twice or more than twice as likely to receive those high cost loans in only 70 MSAs.

Hispanics also suffered the same disparities; low-to-middle-income Hispanics were two or more times more likely than comparable whites to receive high-cost loans in 10 MSAs while middle-to-upper income Hispanics were twice as likely to receive high-cost loans in 75 MSAs

The study found some disparities in lending to Asian Americans as opposed to Caucasians, but they were much less significant that with the other minority groups.

African-Americans experienced the largest lending disparities in Southern and mid-west MSAs and in New England while Hispanics were more likely to receive high-priced loans in New England, the West, and Midwest.

The study found that the five worst MSAs for lending to African-Americans are Charleston, SC; Bridgeport, CT; Omaha, NR; Milwaukee, WI; and Springfield, MA.

In court documents filed in the U.S. District Court for the Central District of California the NAACP charged that the lending industry has a long history of discrimination in connection with mortgage loans made to African-Americans and that the Federal Reserve Board had recently concluded that African Americans were more likely to pay higher prices for mortgages than their Caucasian peers. In addition to higher interest rates the suit alleged that subprime loans to African-Americans are "typically laden with improperly disclosed fees, including excessive prepayment penalties which effectively prohibit borrowers from refinancing at a fairer rate." The suit quotes the Center for Responsible Lending estimates that families lose 2.3 billion each year from their home equity wealth because of prepayment penalties in subprime mortgage loans and that African-Americans are more than three times as likely as Caucasians to be placed into one of these subprime loans.

The NAACP claims that "These statistical disparities are not mere happenstance, but instead result from a systematic and predatory targeting of African Americans." The Association states that it is bringing the lawsuit to enjoin the Defendants from continuing their discriminatory practices and to compel their compliance with applicable federal law and to ensure compliance with the same.

Here is a link to a copy of the lawsuit.