>Daily Development for Wednesday, August 21, 2008
>by: Patrick A. Randolph, Jr.
>Elmer F. Pierson Professor of Law
>UMKC School of Law
>Of Counsel: Husch Blackwell Sanders
>Kansas City, Missouri
>dirt@umkc.edu
>
>Here’s a report from Dale Whitman on a provocative trial court decision in New York.
>
>LENDER LIABILITY; PREDATORY LENDING; SUBPRIME LENDING:  New York trial court holds that a loan to a minority borrower in a minority neighborhood, with an APR more than 3% above the comparable Treasury rate, is presumed to be illegally discriminatory.

>
>M & T Mortg. Corp. v. Foy, 20 Misc.3d 274, 858 N.Y.S.2d 567 (Supp.2008)
>
>In 2000 Foy obtained a mortgage loan on a house she owned in a predominantly Black and Hispanic area of Brooklyn. The loan was for a 30-year term with an interest rate of 9.5%. Foy was a military reserve officer and had served several recent active duty tours overseas. The property was evidently used for rental, at least when she was out of the country, but she alleged that it was difficult to manage the property and keep viable tenants.

>
>Foy moved for reformation of the mortgage pursuant to New York Military Law, and apparently also alleged that the loan was racially discriminatory. The form of discrimination alleged was "reverse red-lining," under which a lender makes loans on more burdensome terms in minority areas. Apparently the court viewed this allegation as a potential violation of the Fair Housing Act. Initially the court placed the burden of proving discrimination on Foy, but in the present opinion it reverses that decision.

>
>Thus, the court holds that a "higher priced loan" (one exceeding 9% interest), if made to a minority borrower in a predominantly minority area, is presumed to have been discriminatory, placing the burden on the lender to show that it is not. If the lender is unable to rebut the presumption, the court says that it will impose equitable remedies, without saying exactly what they might be. It implies that it might deny the lender's right to pursue the foreclosure, or might refuse to grant a deficiency judgment.

>
>Reporter’s Comment 1: The 9% level used by the court is "borrowed" from the Home Mortgage Disclosure Act, which requires separate reporting by lenders of "higher priced loans," defined as loans with an APR of more than 3% above the rate on Treasury securities of comparable maturity. Using the APR makes sense because it takes into account high loan fees as well as high stated interest rates. During nearly all of the 2000-2008 period, long Treasury bonds were below 6%.

>
>It's significant that the court did not use the "high cost loan" definition of the Home Ownership and Equity Protection Act (HOEPA); it defines "high cost loan" to be a loan with an APR of more than 8% above the comparable Treasury rate – a definition which would only be triggered by loans of around 14%. This is one of many reasons that HOEPA is often ridiculed by predatory loan opponents as a "toothless tiger."

>
>Reporter’s Comment 2: The original lender in this case was Community Bank, which subsequently sold the loan to M&T Mortgage. A finding of discrimination might not be difficult, since the Bank was presumably making plenty of normal-rate (e.g., around or below 6%) loans during the same period it made this 9.5% loan. But suppose the lender in question was only in the business of making high-rate loans in minority areas. How does one prove discrimination? Indeed, how can there be discrimination if the lender only loans to minorities, and only at high rates?

>
>Reporter’s Comment 3: What about the underlying issue? It is perfectly clear from the HMDA data that minorities are much more likely that white borrowers to receive high-priced loans. Lenders typically claim that this is because they have weaker underwriting qualifications: more marginal incomes, worse credit histories, and the like. Borrower advocates typically claim that it's because they are targeted by predatory lenders, and that in many cases they are fully qualified for prime loans. Who is right? The HMDA data turn out not to be useful in answering this question, because those data don't contain any information about credit-worthiness; no FICO scores, for example, nor any reasonable substitute for them. This fact, and the history behind it, is nicely summarized and documented at the following blog, which is well worth reading. https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://calculatedrisk.blogspot.com/2007/10/hmda-data-on-high-priced-loans.html.

>
>Reporter’s Comment 4: If you're in the mood for a little fun, check out Jon Stewart's interview with former subprime wholesale lender Richard Bitner, available at https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://www.thedailyshow.com/video/index.jhtml?videoId=177062%26title=richard-bitner

>
>The Reporter for this item was Dale Whitman of the Missouri, Columbia, Law School, emeritus.
>
>Readers are encouraged to respond to or criticize this posting.
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