Supreme Court Confronts Racial Impact of Predatory Loans in Financial Crisis

Henry Gass and Laurent Belsie, Christian Science Monitor, November 7, 2016

The landmark Fair Housing Act and the continuing fallout from the 2008 housing crisis are converging at the United States Supreme Court Tuesday.

As a legal question, the case involves whether cities should be able to sue banks over damages incurred by alleged Fair Housing Act violations. But beyond the courtroom, the case illustrates how, despite decades of progress under the 1968 Fair Housing Act, racial discrimination in the real estate market appears to remain stubbornly ingrained, though in new forms.

Specifically, Miami alleges that Wells Fargo and Bank of America engaged in discriminatory mortgage-lending practices, and that those practices led to widespread defaults by minority homebuyers. The foreclosures have caused the city “significant, direct, and continuing financial harm.”

The Supreme Court’s eight justices will only consider whether Miami can legally bring such a claim against the banks.

If the Supreme Court decides that Miami qualifies as an “aggrieved person” under the Fair Housing Act, the ruling would give cities access to crucial funds and deter banks from continuing discriminatory lending practices, Miami’s supporters say. The banks counter that it would set a dangerous precedent, exposing lenders to endless lawsuits and deterring them from giving loans that can help potential homeowners build wealth.

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Minority neighborhoods were hit particularly hard by the subprime trend. Studies suggest that black borrowers in 2006 were three times more likely to get a subprime loan than a conventional one; for Hispanics, the ratio was 2 to 1. Whites had slightly better than 50-50 odds of getting a conventional loan.

When the crisis hit, nearly 8 percent of blacks and Hispanics who had borrowed between 2005 and 2008 lost their homes in foreclosure; for whites, it was 4.5 percent, according to one study. Between 2007 and 2009, a typical black household saw its wealth dip 19 percent versus 12 percent for whites.

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{snip} After alleging that Wells Fargo steered some 1,000 minority residents to subprime loans, Baltimore convinced the US Department of Justice to intervene and in 2012 won a $175 million settlement from the bank. The bank, the largest US mortgage lender, has also settled with Memphis in the wake of claims of predatory lending. But other predatory lending cases against it, brought by Cook County, Ill., and Los Angeles, have been dismissed.

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The US Chamber of Commerce agrees. A ruling against the banks “threatens to undermine the very purposes of the Fair Housing Act by discouraging socially valuable lending to underserved communities by imposing outsized legal risks on such activities,” it adds in an amicus brief.

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