>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.
>
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