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From Redlining to Target Practice

posted by Elizabeth Warren

Redlining was a practice that banks once used:  hang a map on the wall, draw a red line around minority neighborhoods, and deny all mortgage loans inside the line.  The results were devastating--depressed prices because no one could get financing to buy homes and underinvestment in African American and Hispanic communities.

But those bad old days are gone.  Now some lenders seem to draw a line around minority neighborhoods, then paint a big bulls-eye on them.  That's where they target their worst mortgages.  Massachusetts Attorney General Martha Coakley filed suit yesterday against Option One, the mortgage arm of H&R Block, alleging that they piled on costs for non-white families.

The specific examples are breath-taking:  A black borrower with a 523 credit score paid $10,635 to refinance $167,000, while a white borrower with a 520 credit score paid $2,275 to refinance $200,000.  Coakley said this was happening systematically across Massachusetts and elsewhere in the country.

The things hit me as I read this story:

1.  Hurrah for Martha Coakley. This isn't the first public conversation about about systematic discrimination in subprime lending.  I'm glad to see a state AG step up, investigate and, if the facts bear it out, bring charges.  Where are the rest of the AGs? Each one of them should be investigating mortgage practices.   

2.  Why isn't there an outcry against H&R Block? This is a well-known company with offices in minority and white communities across the country.  Yes, they sold their housing unit this spring, but Coakley says this company followed procedures that systematically targeted minorities to pay far more than whites for the same loans.  Coca-cola made national headlines years ago when some executives were caught on tape making racist comments.  What about following policies that, if proven, show that this company stripped hard work black and Hispanic families of their money? Where are the boycotts and the cover stories in Newsweek and Time?

3.  This short article refers to a nice interplay between the academic world that identified the problem, the private practitioner (a shout-out to Gary Klein of Boston) who brought the first suit, and the AG who followed up with a state investigation.  Good people, all pushing to expose serious problems.

Some lenders have abandoned redlining because they have figured out that they can make more money by target shooting at minority families. Either way, the devastation is extensive.


The MA AGs office is also looking at Harmon Law Offices, one of the foreclosure mills that is MA based but licensed to practice in RI and NH as well. Complaints are on file in both of those states as well.

The owner of the firm, Mark Harmon, also owns Commonwealth Auctions - an auction house that handles much of the foreclosure business that HLO generates, Northeast Abstract Title and Realty Funding.

Seems to me that it would be a conflict of interest for the owner of a foreclosure mill to also own the auction house that handles the liquidation of the properties. Of course, Harmon has also settled two CAs against them for FDCPA violations and Mark Harmon has had a verdict rendered against him and Realty Funding in NH for FDCPA violations as well. I wonder how much of this Harmon learned from the United States Foreclosure Network (usfn.org)?

Here we go again blaming the big bad lenders. I say these types of lawsuits are bunk. I am a black mortgage broker and the reason I say they are bunk is because I would bet a sizeable sum of money that the LOs banging those borrowers for $10k in fees are black too.

See, most successful LOs have a niche. And often that niche is race, ethnicity, religion, etc. That is how you earn business. Often times, when I see minority borrowers getting taken advantage of, it is by other minorities. They prey on the trust factor. The borrowers also don't make any effort to comparison shop. A five minute phone call will expose any broker/banker trying to take advantage of a borrower with excessive fees. Most brokers don't need to make $10k on a loan to be happy. However, without actually seeing the fee break down and specifics of the loan, it is hard to say if $10k in fees is excessive. On the surface it is, but there are times when it is justified particularly if that money is being used to buy out of a prepay penalty, discount points, etc.

Anyone with a 532 FICO score should be happy a bank is even willing to give them a loan, even if it cost $10k. A 532 FICO means you don't pay anything on time... EVER. I wouldn't loan a person with a 532 FICO a stick of gum. I have seen people 6 mos out of bankruptcy with scores higher than a 532. That FICO score is frame on the wall material. It also means one of the other bureaus scores were lower since lenders use the middle score!

It is hard to say these actions are systematic. I have NEVER seen a bank have different pricing for people based on race. The ONLY things that matter are credit, income, assets, property, and loan to value. Any pricing variation is ALWAYS done at the loan officer level since the LO is the one who ultimately controls price (rate and fees). That variation is based on how much work is needed to actually get the file closed. Subprime loans often take a ton of work - massaging credit scores, credit repair, etc.

Don't the individual lenders have their own "proprietary" lending standards they go by also, besides "Fair Isaac"? I think we have talked about this in a past blog here or was it Liz Weston??? My concern is that because these standards of scoring are “proprietary” and no one has the right to see how the lenders figure the scores, it could conceivably have a “race” card in there and we could never know. Even though it is highly illegal and of course the lender is going to deny, how are we to know otherwise? For an AG to do this type of action, I think is unusual. The State is not going to want to pay the bill if there is not evidence you can take at face value.

What about "Points" and other doc fees. Don't they require a certain amount down? They call them "points" right? You pay so many "points" for origination based on certain criteria, right? Could it be those "points" that are the subject of the suit? Forgive me I haven’t read it yet.

Each lender makes their own tweaks to their underwriting guidelines, but for the most part they all use standard credit reports from the three major bureaus - equifax, transunion, and experian. Some of the subprime lenders had programs where they would take the highest of the three instead of the middle score. Some may allow certain tradelines or a certain amount of collections, judgements, etc. However, they all used a standard FICO score. At worst, the lender may only use the credit report they pull and not the broker supplied credit report. Regardless, unless race is tied to a SS# I don't know how race can be taken into account.

Like I said, the only discrimination is at the individual LO level. Some LOs may charge more to unsavy borrowers regardless of race. If the borrower isn't shopping the LO and the LO feels they can get away with it, the borrower gets charged more regardless of race.

The problem with these types of lawsuits is that there is no way to really know what the circumstances are on each loan. You can't simply say Buyer A had a 520 and Buyer B had 520 they should both be charged the same. It is a lot more complicated than that - you also have loan-to-value, property location, property type, assets, rate, fees, current market pricing, and a whole host of other issues to consider. EVERY DEAL IS UNIQUE. There is no such thing as a prevailing rate and fees.

"Option One and H&R Block provided information to their employees about how the limited choices available to these borrowers made them good candidates for subprime loan products. Specifically, the companies encouraged employees and brokers to focus on the “emerging markets” of black and Latino homebuyers, who Option One and H&R Block described as having credit concerns, a lack of familiarity with the credit system and difficulty demonstrating conventional credit history. The companies also instructed loan officers and mortgage brokers to partner with real estate brokers to who shared the same race or ethnicity as minority borrowers and to work with “trusted groups in the community” in order to sell H&R Block products. H&R Block encouraged specific tactics such as visiting community centers and houses of worship to target specific communities and gain the confidence of potential black and Latino borrowers."


WOW! I finally got around to actually reading it! It just makes me mad. I see a lot of option one loans in Bankruptcy and a lot are those 80/20s’. I had no idea that they were owned by H&R. It’s kind of funny that they didn’t have to produce those tax returns via the “alt A” or no doc. They "H & R" may have filed the actual returns for those people. Didn’t they take that rout in that "investment" deal? The “deal” was, encouraging people to sink their IRS refunds into investments that were loaded with their fees?

Were Asians (a minority) redlined? Of course not. Blacks were redlined because the are in fact poor credit risks, just as they have higher criminality. Government interference in the free market is what led to the subprime crash and it may bring down the whole system.

No, there wasn't anything wrong with mortgage lending practices. It was all just those dang speculators.... [/sarcasm>


Illinois to sue Countrywide and CEO Mozilo

Wed Jun 25, 2008 7:22am EDT


Illinois to Sue Countrywide

Published: June 25, 2008

* * * * * *

In reviewing one Illinois mortgage broker’s sales of Countrywide loans, the complaint said the “vast majority of the loans had inflated income, almost all without the borrower’s knowledge.”

* * * * *

The Illinois complaint was derived from 111,000 pages of Countrywide documents and interviews with former employees. It paints a picture of a lending machine that was more concerned with volume of loans than quality.

For example, former employees told Illinois investigators that Countrywide’s pay structure encouraged them to make as many loans as they could; some reduced-documentation loans took as little as 30 minutes to underwrite, the complaint said.

The lawsuit cited Countrywide documents indicating that almost 60 percent of its borrowers in subprime adjustable rate mortgages requiring minimal payments in the early years, known as hybrid A.R.M.’s, would not have qualified at the full payment rate. Countrywide also acknowledged that almost 25 percent of the borrowers would not have qualified for any other mortgage product that it sold.

Even more surprising, Ms. Madigan said, was her office’s discovery of e-mail messages automatically sent by Countrywide to its borrowers offering complimentary loan reviews one year after they obtained their mortgages from the company.

“Happy Anniversary!” the e-mail messages stated. “Many home values skyrocketed over the past year. That means that you may have thousands of dollars of home equity to borrow from at rates much lower than most credit cards.”

Ms. Madigan said, “I was just struck that on the first anniversary of these people’s loans they would get these e-mails luring them into a refinance, into another unaffordable product to generate more fees and originate more loans.”



Monday, June 30, 2008; A02

Are subprime loans targeted at minorities or at minority neighborhoods? Ingrid Gould Ellen, a professor of public policy at New York University, thinks there is evidence it is the latter.

In an analysis she helped perform for the Furman Center for Real Estate and Urban Policy, where she is a co-director, Ellen drew up lists of the 10 neighborhoods in New York City with the largest number of subprime mortgages and the 10 with the smallest number.

In the neighborhoods with the highest numbers of those loans -- such as University Heights/Fordham, Jamaica and East Flatbush -- subprime loans accounted for nearly half of the mortgages issued.

On average, those 10 neighborhoods were around 5 percent white, 5 percent Asian, 59 percent black and 31 percent Hispanic. The neighborhoods with the smallest numbers of subprime loans, on the other hand, were around 55 percent white, 12 percent Asian, 14 percent black and 19 percent Hispanic.

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