The practice of targeting minority communities for predatory
lending is called "reverse redlining." It is the United States'
view that "reverse redlining" can violate the Fair Housing Act
and the Equal Credit Protection Act.
- Prohibiting Reverse Redlining is Consistent with
the Purpose of the Fair Housing Act to eradicate
As used by Congress and district courts, "reverse redlining"
refers to "the practice of targeting residents in certain
geographic areas for credit on unfair terms." Newton v. United
Companies Fin. Corp., 24 F. Supp.2d 444, 455 (E.D. Pa. 1998);
accord Williams v. Gelt Fin. Corp., 237 B.R. 590, 594 (E.D. Penn.
1999) ("reverse redlining" is the practice of "targeting of
persons for 'credit on unfair terms' based on their income, race,
or ethnicity") (quoting S. Rep. No. 103-169, at 21 (1993)). In
contrast to "redlining," which "is the practice of denying the
extension of credit to specific geographic areas due to the
income, race, or ethnicity of its residents," "[r]everse
redlining is the practice of extending credit on unfair terms to
those same communities." United Companies Lending Corp. v.
Sargeant, 20 F. Supp.2d 192, 203 n.5 (D. Mass. 1998) (citing S.
Rep. No. 103-169, at 21 (1993)).
Following a series of hearings documenting the abuses of
reverse redlining,(4) Congress passed the "Home Ownership and
Equity Protection Act" (HOEPA), 15 U.S.C. § 1639, an amendment to
TILA, to provide borrowers some protection from predatory
lenders. Congress again held hearings on predatory lending in
1998.(5) As Senator John Breaux explained at the later hearings,
"[p]redatory lenders use deceptive and intimidating practices to
coerce homeowners into accepting loans that will ultimately prove
detrimental to their financial situation." Hearings: Equity
Predators, note 4, supra, at 4. The Senate Report accompanying
HOEPA provides a typical portrait of such "home equity scams":
The lenders "hustle" their targets into taking out mortgages
with extremely high interest rates, fees, or both. The
homeowner often says they were misled about the payment
schedule or were even unaware that they signed a mortgage
S. Rep. No. 103-169, at 22. Some of the worst and most common
abuses include equity stripping, packing, flipping, home
construction scams, and abusive loan servicing. Described at
Section III.A.4, infra.
Redlining creates the market conditions in which reverse
redlining thrives. It should come as no surprise that the United
States recently settled a case charging Chevy Chase Federal
Savings Bank with redlining the exact areas that Defendants are
now accused of targeting for predatory lending. See United
States v. Chevy Chase Fed. Sav. Bank, No. 94-1824 (JG) (D.D.C.,
consent decree filed Aug. 22, 1994). Where entire communities
are abandoned by mainstream financial institutions, they become
attractive prey to unscrupulous lenders. Sargeant, 20 F. Supp.2d
at 202; S. Rep. No. 103-169, at 21 (1993) ("communities lacking
access to traditional lending institutions are being victimized"
by predatory lenders); Hearings: Reverse Redlining, note 4,
supra, at 285, 312 (Statement of Sen. Paul Sarbanes; Special
Report of the Mass. Attorney Gen.). As the court in Sargeant
explained, reverse redlining, like redlining, is an example of
Redlining and reverse redlining by banks, savings and loans,
finance companies, and second mortgage companies impede the
self-correcting elements of the market, rendering it unable
to prevent consumer injury. This market failure prevents
the borrower from taking action reasonably to avoid the
financial pitfalls created by predatory lending.
20 F. Supp.2d at 203. Together, these practices lead to the
formation and maintenance of racial ghettos, see H.R. Rep.
104-193, at 177 (1995) (urban decay blamed, in part, on
redlining), which the Fair Housing Act was enacted to combat.
See, e.g., 114 Cong. Rec. 2275, 2278 (FHA is designed to curb
"racially segregated housing patterns"); H.R. 3504, 95 Cong., 1st
Sess. § 804 (1977) (FHA seeks "to eliminate the discriminatory
business practices which might prevent a person economically able
to do so from purchasing a house regardless of his race.")(6). As
one district court explained,
Little imagination is required to understand that the
imposition of barriers to occupancy in the form of higher
mortgage-interest rates or refusals to make loans in
connection with housing in changing neighborhoods works to
discourage families, white or black, which could afford to
purchase homes in such neighborhoods. The practical effect
is to discourage whites -- who may freely move elsewhere --
from moving into vacancies in "changing" neighborhoods,
thereby inducing "massive transition" and, ultimately,
Laufman v. Oakley Bldg. & Loan Co., 408 F. Supp. 489, 496-497
(S.D. Ohio 1976); see also Clark v. Universal Builders, Inc., 501
F.2d 324, 328, 335-336 (7th Cir. 1973), cert. denied, 419 U.S.
1070 (1974) (Section 1982) ("[t]hrough the medium of exorbitant
prices and severe, long-term land contract terms blacks are tied
to housing in the ghetto and segregated inner-city
neighborhoods."). Indeed, reverse redlining is little different
from redlining. In both, a neighborhood is delineated for
negative treatment on the basis of its racial demographics. In
one, credit is denied altogether; in the other, credit is offered
on illegal or unfair terms.
Courts have held that redlining violates the Fair Housing
Act. See, e.g., Nationwide Mut. Ins. v. Cisneros, 52 F.3d 1351
(6th Cir. 1995) (insurance redlining), cert. denied, 516 U.S.
1140 (1996); NAACP v. American Family Mut. Ins., 978 F.2d 287
(7th Cir. 1992) (same), cert. denied, 508 U.S. 907 (1993); Ring
v. First Interstate Mortgage, Inc., 984 F.2d 924 (8th Cir. 1993)
(mortgage redlining); Laufman, 408 F. Supp. 489 (mortgage
redlining); see also Policy Statement on Discrimination in
Lending, 59 Fed. Reg. 18,266 (1994) (FHA and ECOA); 24 C.F.R.
100.110 to 100.135 (FHA).
Reverse redlining can also violate the Fair Housing Act, as
well as ECOA and other civil rights laws. See Clark, 501 F.2d at
328, 335-336 (Section 1982); Contract Buyers League v. F&F Inv.,
300 F. Supp. 210, 216 (N.D. Ill. 1969) (same), aff'd on other
grounds, Baker v. F&F Inv., 420 F.2d 1191 (7th Cir.), cert.
denied, 400 U.S. 821 (1970); Booker v. United Cos. Lending Corp.,
No. 94-RCCV-17 (Ga. Nov. 17, 1997) (state fair housing law);
Alexander v. Kaye-Co., No. 91-RCCV-681 (same); Fairman v.
Schaumburg Toyota, Inc., No. 94-C 5745, 1996 WL 392224 (N.D. Ill.
July 10, 1996) (Section 1981); Hearings: Equity Predators, note
4, supra, at 70 ("if a lender targets borrowers for abusive
practices based on age, race and/or sex, such targeting,
depending on the facts, also could violate the ECOA.") (Prepared
Statement of the FTC). By prohibiting reverse redlining, the
Fair Housing Act "prevents lenders from exploiting the financial
vacuum created by redlining." Sargeant, 20 F. Supp.2d at 203.
- Targeting African American neighborhoods for home
loans designed to fail makes housing unavailable
within the meaning of Section 804(a) of the Fair
Section 804(a) of the Fair Housing Act provides, in relevant
part, that it shall be unlawful
To refuse to sell or rent after the making of a bona
fide offer, or to refuse to negotiate for the sale or rental
of, or otherwise make unavailable or deny, a dwelling to any
person because of race * * *
42 U.S.C. § 3604(a). At a minimum, to establish a violation of
Section 804(a), plaintiffs must prove that defendants made (1) a
dwelling; (2) unavailable; (3) because of race. This Section
addresses the second element, the standard for make housing
unavailable. The first element is addressed at Section III.C.,
infra; the third at Section III.A.5., infra.
Defendants contend that they cannot have violated this
provision of the Act because they make home loans in African
American neighborhoods, suggesting that in the lending context, a
defendant can only violate Section 804(a) by directly denying a
home loan. Defendants' cramped reading of the Fair Housing Act
should be rejected since under certain conditions, providing a
home loan can have the opposite of its usual effect of making
housing available. Defendants' alleged practice of making loans
that are designed to fail makes housing unavailable under the
meaning of Section 804(a).
The Supreme Court has held that the Fair Housing Act is to
be given a "generous construction." City of Edmonds v. Oxford
House, Inc., 514 U.S. 725, 731 (1995); accord Havens Realty Corp.
v. Coleman, 455 U.S. 363, 380 (1982); Trafficante v. Metro. Life
Ins. Co., 409 U.S. 205, 212 (1972). In particular, the phrase,
"otherwise make unavailable or deny" has been broadly construed,
with several courts concluding that this language is "as broad as
Congress could have made it." E.g., United States v. Youritan
Constr. Co., 370 F. Supp. 643, 648 (N.D. Cal. 1973), aff'd in
relevant part, 509 F.2d 623 (9th Cir. 1975); Woods v. Foster, 884
F. Supp. 1169, 1175 (N.D. Ill. 1995); Dunn v. Midwestern
Indemnity Mid-Am. Fire & Cas. Co., 472 F. Supp. 1106, 1108 (S.D.
Section 804(a) reaches "discrimination that adversely
affects the availability of housing." Clifton Terrace Assocs.,
v. United Tech. Corp., 929 F.2d 714, 719 (D.C. Cir. 1991). Under
the broad language of the Act, a direct refusal to rent or sell
housing is not required. Courts have found that Section 804(a)
is violated by a wide variety of practices which have the
indirect effect of denying dwellings, including racial steering,
United States v. Mitchell, 580 F.2d 789 (5th Cir. 1978);
insurance redlining, American Family Mut. Ins. Co., 978 F.2d at
301; mortgage redlining, Laufman, 408 F. Supp. 489;
discriminatory appraisals, Hanson v. Veterans Admin., 800 F.2d
1381, 1386 (5th Cir. 1986); exclusionary zoning, United States v.
Yonkers Bd. of Educ., 837 F.2d 1181 (2d Cir. 1987), cert. denied,
486 U.S. 1055 (1988); and racial and sexual harassment, Byrd v.
Brandeburg, 922 F. Supp. 60, 62-65 (N.D. Ohio 1996) (racially
motivated firebombing); Williams v. Poretsky Mgm't, 955 F. Supp.
490, 498 (D. Md. 1996) (sexual harassment leading to constructive
Making loans that are designed to fail also makes housing
unavailable. As the FTC explained before a Senate Committee,
[a]s a general rule, loans made to individuals who do not
have the income to repay such loans usually are designed to
fail; they frequently result in the lender acquiring the
borrower's home equity. The borrower is likely to default,
and then ultimately lose her home through foreclosure or by
signing over the deed to the lender in lieu of foreclosure.
Hearings: Equity Predators, at note 4, supra, at 66 (Prepared
Statement of the FTC). Where Defendants' practice is to make
loans that are designed to fail, they are not in the business of
providing housing, but of taking it away. Such a practice is
akin to discriminatory evictions. See 24 C.F.R. 100.60(5)
(evicting tenants because of their race would violate Section
804(a)). It makes no difference that the evicting landlord
initially provided the housing; the same is true in the lending
Moreover, making a loan that is designed to fail makes
housing unavailable even if foreclosure has not yet occurred.
This is because an "aggrieved person" under the act includes any
person who claims to have been injured or "believes that [he]
will be injured by a discriminatory housing practice that is
about to occur." 42 U.S.C. § 3602(i) (emphasis added). The HUD
The phrase "is about to occur" applies to a number of
situations in which it is clear to a person that, if he or
she takes an action, he or she will be subjected to a
discriminatory act which will result in an injury. In such
cases, the Fair Housing Act does not require these persons
to expose themselves to the injury involved with the actual
act of discrimination before filing a complaint.
24 C.F.R., ch. 1, subch. A, app. 1, subpart A.(7) As this Court
has held, "[n]othing in the FHA requires that before filing suit
plaintiffs must * * * lose their homes * * *. Such a requirement
would directly contravene the purposes of the FHA." Wai v.
Allstate Ins. Co., 75 F. Supp.2d 1, 6 (D.D.C. 1999)
(discriminatory refusal to provide liability insurance to
landlord violates Section 804(f) because it creates a
disincentive to rent to disabled persons).
- Targeting African American neighborhoods for
predatory home loans can discriminate within the
meaning of Sections 804(b) and 805 of the Fair
Housing Act, even without comparative evidence.
Section 804(b) of the Fair Housing Act states that it shall
To discriminate against any person in the terms,
conditions, or privileges of sale or rental of a dwelling,
or in the provision of services or facilities in connection
therewith, because of race * * *
42 U.S.C. § 3604(b) (emphasis added). To establish a violation
of Section 804(b), plaintiffs must prove that (1) with respect to
a dwelling; (2) defendants have discriminated against any person;
(3) in the terms, conditions, or privileges of sale or rental of
a dwelling, or in the provision of services or facilities in
connection therewith; (4) because of race.
Section 805 makes it unlawful
for any person or other entity whose business includes
engaging in residential real estate-related transactions to
discriminate against any person in making available such a
transaction, or in the terms or conditions of such a
transaction, because of race.
42 U.S.C. § 3605(a) (emphasis added). To establish a violation
of Section 805, plaintiffs must prove that (1) defendants'
business includes engaging in residential real estate-related
transactions; (2) defendants have discriminated against any
person; (3) in making available a residential real estate-related
transaction or in the terms or conditions of such a transaction;
(4) because of race. This Section addresses the second element
of Sections 804(b) and 805: the standard for proving whether
defendants have discriminated against any person. The first
element of Section 804(b) is addressed at Section III.C, infra;
the third element of Sections 804(b) and 805 at Section III.B.,
infra; and the fourth element of Sections 804(b) and 805 at
Section III.A.5., infra. The first and third elements of Section
805 are undisputed in this case.
Defendants argue that since they provide credit to African
American borrowers on the same terms as to non-African Americans,
they do not "discriminate" within the meaning of Sections 804(b)
or 805. This argument mistakes a challenge of proof for a
statement of legal principle and should be rejected. Comparative
evidence is one, but by no means the sole, method of establishing
Defendants allegedly target African American, and not white,
neighborhoods for their predatory lending. Indeed, most of
Defendants' loans are made to African Americans in majority
African American census tracts. For this reason, there will be
few, if any, similarly situated whites for comparison. But
whether a similarly situated person was treated differently is an
evidentiary matter, not an element of proof. The Supreme Court
recently decided the issue in the employment discrimination
context. In Oncale v. Sundowner Offshore Servs., Inc., 523 U.S.
75, 80-81 (1998), which involved an all-male work site, the Court
held that same-sex sexual harassment can violate Title VII. In
so doing, the Court rejected the employer's argument that an
employee can never state a claim for sexual harassment in an all-male work place because there are no similarly situated female
employees with whom to compare the male's treatment. The Court
explained that an inference of discrimination can be derived from
a number of evidentiary sources, not limited to comparable
evidence of how an alleged harasser treats both sexes in a mixed-sex work place. The Court allowed that an inference of
discrimination could also be made from evidence that the victim
was harassed "in such sex-specific and derogatory terms * * * as
to make it clear that the harasser is motivated by general
hostility to the presence of women in the workplace." Id.;
accord Washington v. Davis, 426 U.S. 229, 242 (1976)
(discriminatory purpose can be inferred from "the totality of the
circumstances, including the fact, if it is true, that the law
bears more heavily on one race than another.") (emphasis added).
Indeed, any other outcome would belie the very notion of
discrimination and the purpose of anti-discrimination laws. As
the Supreme Court once pointed out, Congress could not have
intended to insulate from Title VII redress a situation in which
"an employer hired a woman for a unique position in the company
and then admitted that her salary would have been higher had she
been male." County of Washington v. Gunther, 452 U.S. 161, 179
(1981). The same is true in the fair housing context. In
Contract Buyers League, 300 F. Supp. at 216, defendants argued
that there could be no discrimination under Section 1982 for
selling property to African Americans at high prices because
"there can be no discrimination unless the same seller actually
sells to whites at a lower price." The court considered this
argument "obnoxious" and "ridiculous," explaining,
It would mean that the 1866 Civil Rights Act, which was
created to be an instrument for the abolition of
discrimination, allows an injustice so long as it is visited
exclusively on negroes.
Id. Similarly, a landlord who delays maintenance on his building
because most of his tenants are minority would clearly violate
the Act, even if he owned no other building with a majority of
white tenants with which to compare. See 24 C.F.R. 100.65(b)(2)
(failing or delaying repairs to a dwelling because of race would
violate Section 804(b)). Similarly, a landlord who sexually
harasses his female tenants is not insulated from liability just
because all his tenants are female. See 24 C.F.R. 100.65(b)(5)
(quid pro quo sexual harassment violates Section 804(b)).
Clearly, then, successfully targeting all of one's lending to
minorities or minority areas, while providing equally unfair or
illegal loan terms to all borrowers, does not provide a safe
harbor under the Fair Housing Act.
To uphold Defendants' position would be to ratify the dual
lending market that has developed from racial segregation,
discriminatory appraisals, and mortgage and insurance redlining.
It would allow one class of lenders to market a high quality loan
product to white areas, while another markets a predatory product
to minorities. See Contract Buyers League, 300 F. Supp. at 215
("It was the [Supreme] Court's conclusion [in Jones v. Alfred H.
Mayer Co., 392 U.S. 409 (1968)] that the existence of a black
market distinct from a white market was the de facto vestige of
what the Congress in 1866 intended to abolish as a critical means
of making the black man a free man."); id. at 216 ("under 1982 as
interpreted in Jones v. Alfred H. Mayer Co. there cannot in this
country be markets or profits based on the color of a man's
skin."); accord Clark, 501 F.2d at 328, 335-336.
- The term "predatory lending" provides an adequate
benchmark of discrimination.
Defendants contend that reverse redlining does not state a
claim under the Fair Housing Act because "predatory lending" is a
"vacuous" concept. They argue that courts will not be able to
distinguish "predatory" from unconventional lending, and as a
result lenders will be chilled from lending in minority areas
because of fears that a court might consider their novel loan
product "predatory." In essence, Defendants rehash their earlier
argument that racially targeted predatory lending cannot
constitute discrimination under the Act where there are no white
comparators. They claim that without the direct comparison
within a single defendants' portfolio, it will be impossible to
distinguish abusive from high-risk loans.
In our view, however, "predatory lending" is sufficiently
identifiable such that, when its victims are selected based on
race, it constitutes discrimination. See Hearings: Reverse
Redlining, note 4, supra, at 246 ("so-called reverse redlining is
among the most pernicious forms of racial and ethnic
discrimination and consumer fraud.") (Statement of Sen. Alfonse
M. D'Amato). Of course, the benchmark of discrimination will be
more readily apparent where the defendant does business in
majority as well as minority markets. But as discussed above,
the fact that a defendant does business only in minority areas
cannot insulate his business practices from scrutiny under the
nation's fair housing laws. Where a lender uses race to decide
where to conduct the type of mortgage lending business that has
variously been described as "predatory," "consumer fraud," "loan
sharking," "mortgage scams" or simply theft,(8) that lender
discriminates within the meaning of the Fair Housing Act. See
also Hearings: Equity Predators, note 4, supra, at 2 (describing
"equity predators," as "con artists" "in the cheating and
swindling business") (Statement of Sen. Charles Grassley). To
suggest that courts will not be able to distinguish these
practices from good faith but high-risk mortgage lending calls
into question the ability of governments ever to regulate the
lending industry to protect consumers against unfair or deceptive
practices. See Chedick v. Nash, 151 F.3d 1077 (D.C. Cir. 1998)
(upholding jury verdict against Capital City and Nash for
Contrary to Defendants' suggestion, predatory lending is not
a novel or ill-defined concept. In 1993, Congress held a series
of hearings on predatory lending, and the following year it
amended the Truth in Lending Act to begin to address the problem.
See note 4 and accompanying text, supra. Massachusetts did the
same by establishing a commission to study the problem of
predatory lending and then enacting regulations to address it.
See Sargeant, 20 F. Supp.2d 192. Congress held further hearings
on the topic in 1998.
These legislative and administrative processes have
identified some of the more prevalent and harmful practices.
Foremost among them is "equity-stripping":
This often begins with a loan that is based on equity in a
property rather than on a borrower's ability to repay the
loan -- a practice known as "asset-based lending." As a
general rule, loans made to individuals who do not have the
income to repay such loans usually are designed to fail;
they frequently result in the lender acquiring the
borrower's home equity. The borrower is likely to default,
and then ultimately lose her home through foreclosure or by
signing over the deed to the lender in lieu of foreclosure.
Hearings: Equity Predators, note 4, supra, at 66 (Prepared
Statement of FTC). Others include "packing," that is, taking on
credit insurance or other "extras" to increase the lender's
profit on a loan; "flipping," the practice of inducing a consumer
to refinance a loan, repeatedly, often within a short time frame,
charging high points and fees each time; and home improvement
scams. Id. at 69. Predatory lending practices also often
involve loan servicing practices that extract monies not owed
under the loan terms or inhibit refinancing options with another
A lender may provide inaccurate monthly-payment demands,
adding fees and charges that are not owed. Because of the
complexities of loan terms, it is difficult for the borrower
to know whether the lender's payment demands are accurate.
A lender also may fail to provide full or accurate pay-off
information. Consequently, the borrower becomes tied to a
lender without a means of escape.
Id. at 69; see also Hearings: Equity Predators, note 4, supra, at
4 ("What makes these bad apples different from the good guys in
the [subprime] industry is the use of deception, forged
documents, and intimidating borrowers into borrowing money based
not on their ability to repay the loan, but rather on the equity
that exists in their home.") (Statement of Sen. John Breaux).
Plaintiffs allege that Defendants have engaged in a number
of the more common predatory lending practices. In particular,
they are alleged to use deceptive practices to make loans without
regard to repayment ability, tack on unnecessary insurance
charges, and engage in a number of abusive servicing practices.
Indeed, the FTC has filed a 24-page complaint alleging that
Defendants' lending practices violate four federal banking laws,
Plaintiffs' discrimination claims notwithstanding. If these
allegations are proven, we believe a clear case of predatory
lending will have been established.
Courts are often called upon to draw difficult lines on the
basis of seemingly vague concepts, even in the area of finance.
See, e.g., Sargeant, 20 F. Supp.2d at 204-205 (state regulation
prohibiting mortgage lenders from negotiating or procuring terms
which "are otherwise unconscionable" is not unconstitutionally
vague). That future cases may pose difficult challenges to
discern "predatory" practices should not deter the court from
deciding this case, in which Defendants' practices are alleged to
violate a number of consumer protection laws in addition to civil
- Targeting African American neighborhoods for
predatory loans is an activity that is "based on
race" within the meaning of Sections 804(a), (b),
and 805 of the Fair Housing Act.
Under the Fair Housing Act, that an action was taken
"because of race" can be established by proving either that a
defendant acted with a racially discriminatory intent, or by
proving that the defendant's action had a racially discriminatory
Determining whether an entity has acted with a
discriminatory intent "demands a sensitive inquiry into such
circumstantial and direct evidence of intent as may be
available." Village of Arlington Heights v. Metropolitan Hous.
Dev. Corp., 429 U.S. 252, 266 (1977) (equal protection). The
plaintiff need not show that the decision-maker was motivated
solely by racial concerns. Id. at 265.
For a reverse redlining claim, intentional discrimination
can be proven with evidence that defendants deliberately targeted
African Americans for their predatory loans. Cf. Fairman, 1996
WL 392224, at *6 (targeting African American and Hispanics for
loans with inflated interest rates states a claim under Section
1981: "the alleged actions of targeting minorities are
intentional acts, thus fulfilling the intent element"); United
States v. Avery, 137 F.3d 343, 355 (6th Cir. 1997) (intentionally
targeting individuals for police investigation because of their
race violates equal protection). It is no defense that the
Defendants may have been motivated by economics rather than race
where it can be shown that they deliberately used race as an
instrument to achieve their underlying goal. Intentional
discrimination does not require that a defendant act with
discriminatory motive. Palmore v. Sidoti, 466 U.S. 429, 433-434
(1984); Cooper v. Aaron, 358 U.S. 1, 14-16 (1958); Gautreaux v.
Romney, 448 F.2d 731, 737-738 (7th Cir. 1971). As Judge Posner
so aptly put it, "[d]iscrimination may be instrumental to a goal
not itself discriminatory, just as murder may be instrumental to
a goal not itself murderous (such as money); it is not any the
less--it is, indeed, more clearly--discriminatory on that
account." Village of Bellwood v. Dwivendi, 895 F.2d 1521, 1531
(7th Cir. 1990).
Statistical evidence of targeting can be sufficient to raise
a factual dispute of intentional discrimination. Hazelwood Sch.
Dist. v. United States, 433 U.S. 299, 307-308 (1977) (when "gross
statistical disparities can be shown, they alone may in a proper
case constitute a prima facie proof of a pattern or practice of
discrimination."); International Bhd. of Teamsters v. United
States, 431 U.S. 324, 340 n.20 (1977) ("In many cases the only
available avenue of proof is the use of racial statistics to
uncover clandestine and covert discrimination.").
A reverse redlining claim can also be proven under a
disparate impact theory, even where the marketing practices
alleged to have a discriminatory effect are subjective or
discretionary practices. Cf. Watson v. Fort Worth Bank & Trust,
487 U.S. 977 (1988) (under Title VII, disparate impact theory can
be used to analyze subjective and discretionary criteria);
Steptoe v. Savings of America, 800 F. Supp. 1542, 1546-1547 (N.D.
Ohio 1992) (plaintiffs' made out prima facie case of
discriminatory appraisal methods under FHA using disparate impact
theory). A prima facie case of disparate impact discrimination
can be established by showing that the defendant's actions have
an adverse impact on a particular minority group, or by showing
that defendant's actions perpetuate residential segregation.
Huntington Branch, N.A.A.C.P. v. Town of Huntington, 844 F.2d
926, 937 (2d Cir.), aff'd per curiam, 488 U.S. 15 (1988);
Metropolitan Hous. Dev. Corp. v. Village of Arlington Heights,
558 F.2d 1283, 1290 (7th Cir. 1977), cert. denied, 434 U.S. 1025
(1978). Once adverse impact or segregative effect is
established, the burden shifts to the defendant to prove that
there is a "bona fide and legitimate justification" for the
action and that there are "no less discriminatory alternatives"
which can serve that end. Huntington Branch, NAACP, 844 F.2d. at
935-937, 939; accord Resident Advisory Bd. v. Rizzo, 564 F.2d.
126, 149 (3d Cir. 1977), cert. denied, 435 U.S. 908 (1978). The
justification must actually be reflected in the record; "[p]ost
hoc rationalizations" cannot establish a bona fide and legitimate
justification for a discriminatory effect. Huntington Branch,
NAACP, 844 F.2d. at 939, 940.
Like intentional discrimination, a prima facie case of
disparate impact discrimination can be established with
statistical evidence alone. See, e.g., Huntington Branch,
N.A.A.C.P., 844 F.2d at 937. Defendants challenge Plaintiffs'
prima facie case, arguing that they have erred by comparing the
"the number of African Americans who obtain subprime loans from
Capital City against the entire population of D.C. and P.G.
County -- rather than against the population of subprime loan
candidates" (Mem. 22). Defendants have set up a straw man,
however. Plaintiffs have properly relied on a market analysis to
establish their prima facie case of disparate impact
discrimination, that is, they have compared the racial
demographics of Defendants' loans with that of the subprime
market as a whole (Compl. 26; Pl. Mem. 28(10)).
- Targeting African American communities for
predatory lending violates ECOA even though credit
was not denied.
In one paragraph and citing no case law, Defendants assert
that Plaintiffs have not stated a claim for an ECOA violation
because "credit was in fact granted" (Mem. at 47).(11) ECOA
provides, in relevant part:
It shall be unlawful for any creditor to discriminate
against any applicant, with respect to any aspect of a
credit transaction -- (1) on the basis of race.
15 U.S.C. § 1691(a) (emphasis added). Defendants' argument that
ECOA applies only to discriminatory denials of credit is simply
wrong. ECOA covers all kinds of treatment beyond merely loan
approval and denial.
ECOA covers "any aspect of a credit transaction." 15 U.S.C.
§ 1691(a). The Federal Reserve System's regulations define a
"credit transaction" to mean
every aspect of an * * * application for credit or an
existing extension of credit (including, but not limited to,
information requirements; investigation procedures;
standards of creditworthiness; terms of credit; furnishing
of credit information; revocation, alteration, or
termination of credit; and collection procedures).
12 C.F.R. 202.2(m); accord 12 C.F.R. 202, App. D, Supp. I,
§ 202.4-1 (Official Staff Interpretations). Courts have held
that persons who have been granted credit can nonetheless state a
claim of discrimination under ECOA. See, e.g., Anderson v.
United Fin. Co., 666 F.2d 1274, 1276-1277 (9th Cir. 1982);
Newton, 24 F. Supp.2d at 461-462.
- Affirmative marketing that expands housing choice
does not discriminate in violation of the Fair
Housing Act or ECOA.
Defendants contend that if the Fair Housing Act is read to
prohibit reverse redlining, it will "chill" the marketing of
unconventional loan products in minority neighborhoods (Mem. 12-15). Defendants' concern in misplaced. They again rely on the
incorrect notion that there is no difference between predatory
and good faith lending. As discussed at Section III.A.4., supra,
courts will be able to identify predatory practice. Because
lenders can do the same, prohibiting reverse redlining will not
chill good faith lending in minority communities.
The regulations of the Department of Housing and Urban
Development interpreting the Fair Housing Act state that an
affirmative marketing program "designed to make available
information which broadens housing choices" does not violate the
Act, and in fact furthers its goals. 24 C.F.R. ch. 1, subch. A.,
app. I, 54 Fed. Reg. 3235 (Jan. 23, 1989). Similarly, ECOA and
Regulation B allow for "special purpose credit program[s]," 15
U.S.C. § 1691(c), "established and administered to extend credit
to a class of persons who, under the organization's customary
standards of credit-worthiness, probably would not receive such
credit or would receive it on less favorable terms than are
ordinarily available to other applicants applying to the
organization for a similar type and amount of credit." 12 C.F.R.
202.8(a). The participant class may be defined by race, as long
as the program was not established or administered to evade ECOA
or its regulations. 12 C.F.R. 202(b).
The Seventh Circuit, as the only court of appeals to rule on
the issue, has set the standard under the Fair Housing Act for
affirmative marketing plans. See South-Suburban Hous. Ctr. v.
Greater South Suburban Bd. of Realtors, 935 F.2d 868, 882 (7th
Cir. 1991), cert. denied, 502 U.S. 1074 (1992). In that case,
defendants challenged an affirmative marketing plan (AMP) that
required the solicitation of white home seekers to view
particular houses in minority neighborhoods, with the goal of
maintaining integration. Acknowledging that there may be times
when the Act's twin goals of nondiscrimination and integration
are in tension, the court ruled that the AMP at issue presented
no such conflict. The court held that the AMP, which "merely
provided additional information to white home buyers concerning
properties they might not ordinarily know about, and involved no
lessening of efforts to attract black home buyers," served both
In addition to furthering the Fair Housing Act's goal of
integration, * * * the AMP also advances the purpose of the
Act through making housing equally available to all by
stimulating interest among a broader range of buyers.
Id. at 884. The AMP in South Suburban created "precisely the
type of robust multi-racial market activity which the Fair
Housing Act intends to stimulate." Id.
Defendants argue that they, too, are increasing housing
opportunities by providing "invaluable access to credit" to
minorities (Mem. 13). "Access that is based on deceptive
mortgage lending, however, is false access." Hearings: Equity
Predators, at 65 (Prepared Statement of FTC). In contrast to the
AMP upheld in South-Suburban, which set out to market a benign
product (a house) to whites because the market was already
majority minority, Defendants allegedly market a harmful product
(e.g., mortgages designed to fail) only to minorities. We are
confident that lenders, like courts, will be able to distinguish