A Racial Financial Crisis: Rethinking the Theory of Reverse Redlining to Combat Predatory Lending Under the Fair Housing Act
Volume 83, No. 4, Summer 2011
By Charles L. Nier, III & Maureen R. St. Cyr: [PDF]

On January 27, 2011, after interviewing over 700 witnesses and reviewing millions of pages of documents, the Financial Crisis Inquiry Commission (FCIC) issued a 633-page report examining “the causes of the current financial and economic crisis in the United States.” While the report scrutinizes the financial crisis in exacting detail, it largely ignores one crucial aspect of the story: its impact on the African American community. Indeed, even the chapter of the report that directly addresses subprime lending—a practice that has had especially negative consequences for minority communities—fails to discuss the issue of race in any meaningful fashion, making only minor allusions to the fact that certain communities were targeted by lenders for subprime loans. Instead, the chapter describes the process of mortgage-backed securitization that enabled the subprime boom, as well as the lack of effective regulatory oversight to protect borrowers from abusive lending practices. While the report implies that race may have played a role in subprime lending practices, it does so only in passing, noting, for example, that subprime lenders “often preyed on the elderly, minorities, and borrowers with lower incomes and less education.” At no point in its 600-plus pages does the report explicitly recognize the devastating impact that subprime lending practices had—and continue to have—on the African American community. Yet the impact of the financial crisis is nothing short of the preeminent civil rights issue of our time, erasing, as it has, a generation of hard fought wealth accumulation among African Americans.

That such a critical aspect of the financial crisis has been overlooked highlights the manner in which access to credit is seen, perhaps, as a peripheral civil rights issue. But if nothing else, the fallout from the financial crisis has underscored the centrality of fair access to credit to civil rights. Access to credit has a myriad of implications for housing and wealth, and thereby education, employment, criminal justice, and many other civil rights issues. While often not recognized as such, it is a core civil rights issue.

Over the past two decades, some civil rights advocates have sought to use the federal Fair Housing Act to challenge the sorts of predatory practices found in subprime mortgage lending, primarily under a theory of “reverse redlining.” Reverse redlining is “the practice of extending credit on unfair terms” to communities that have been historically denied access to credit, predominantly on the basis of race. The term reverse redlining comes from the manner in which this newer practice builds off of and has been enabled by the older practice of “redlining,” or “denying the extension of credit to specific geographic areas due to the income, race, or ethnicity of its residents.” The lack of lending institutions operating in African American and minority communities led to a credit vacuum in these communities. This dearth of credit created underserved communities that subprime lenders could “easily target and efficiently exploit.”

Reverse redlining has been recognized as a cause of action by the federal courts for over a decade. Nevertheless, the courts remain in conflict as to the proper test that should be applied. One test, established in Hargraves v. Capital City Mortgage Corp., requires a showing of an unfair loan and either intentional targeting or a disparate impact. By contrast, the test established in Matthews v. New Century Mortgage Corp., requires a plaintiff to show that “(1) she was a member of a protected class; (2) that she applied for and was qualified for loans”; (3) that she was given a loan on “grossly unfavorable terms”; and (4) that the lender either continues to provide loans on more favorable terms to other borrowers not in the plaintiff’s protected class, or, intentionally targets plaintiff’s protected class. Courts have also analyzed some claims (i.e., those involving discretionary mortgage-pricing policies) under the more traditional disparate impact framework.

In his work on fair housing issues and the financial crisis, Raymond Brescia has addressed the differing approaches adopted by the courts, commenting that, “[c]onceptually, the approach under [the reverse redlining] framework actually appears to raise more questions than it answers; indeed, in the end, the framework might not be suited to address the many different forms of reverse redlining that have appeared in the context of the subprime mortgage crisis.” This Article will seek to provide clarity to the framework for reverse redlining that Brescia correctly identified as sorely lacking.

Part II of this Article starts by providing some historical background to the subprime lending that led to the financial crisis. It establishes the effect of predatory subprime lending practices on minority communities and demonstrates how such practices constitute lending discrimination. Part III lays out and critiques the reverse redlining framework originally crafted by the Hargraves court. This Part argues that Hargraves is best interpreted as establishing two separate analytical models for assessing reverse redlining claims. One model is premised upon showing that African Americans were intentionally targeted with unfair and predatory loans; the other is a systemic disparate treatment model that looks to both statistical evidence of a financial institution’s lending patterns as well as anecdotal evidence of discriminatory intent. Part IV similarly analyzes and critiques the model of proof established in Matthews. It concludes that Matthews inappropriately distorted the prima facie model of disparate treatment found in the McDonnell Douglas burden-shifting formula by including the requirement that the borrower must have been “qualified” for the loan and by adding the intentional-targeting component developed in Hargraves as an alternative fourth element. Part V discusses the connection between reverse redlining and claims alleging that discretionary mortgage-pricing policies have a disparate impact on minority individuals and communities. Part VI concludes that there are four viable theories for challenging reverse redlining as part of an overall effort to address the civil rights crisis that is plaguing African American communities and that has resulted in wealth stripping and foreclosures.

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