This weekend TCO features our second insightful guest post from our partner in Austin, Texas, Gouri Bhat. Please enjoy.
To the list of evil things that banks will do when left to their own unregulated devices, we must add one more: they deliberately steer African-Americans and Latinos toward predatory home loans, leading inexorably to waves of foreclosures that can decimate communities of color. The practice is known as “reverse redlining” and usually involves targeting residents within certain geographic boundaries based on race or ethnicity, and then offering them credit on more onerous terms that are unfair in comparison to what others are offered.
Legal claims of reverse redlining have enjoyed a renaissance after the 2008 collapse of the subprime housing market and the financial almost-apocalypse it spawned. Two of the most interesting reverse redlining cases working their way through the courts were brought by municipalities—the City of Baltimore and the City Memphis—against Wells Fargo Bank. The lawsuits allege, in novel fashion, that the targeting of African-American borrowers for deceptive and predatory mortgages resulted in greater numbers of foreclosures and vacant properties, which in turn created greater costs for the local governments, now contending with falling property tax revenues and the heightened need for foreclosure-related city services. After initial setbacks, both lawsuits surmounted a major hurdle in recent weeks when federal judges in Maryland and Tennessee allowed the cases to proceed, each finding that the plaintiffs had made the connection between Wells Fargo’s practices toward African-American borrowers and the injuries suffered by the municipalities. See the judges’ decisions here and here.
The celebrated rise in homeownership in the U.S. in the decade before the 2008 collapse can be largely attributed to increasing numbers of African-American and Latino homeowners who purchased property through the subprime market. This was no mere coincidence. The subprime housing market preys on communities with a dearth of lending alternatives, borrowing experience and access to clear information. Communities of color fit the bill in many parts of the country, and the mortgage industry figured this out. Sadly, the very conditions that allowed reverse redlining to take root and thrive—lack of clear information for consumers and lack of accountability in mortgage origination—may never be remedied if Republican efforts to hogtie the new Consumer Financial Protection Bureau succeed.
Guest post by Gouri Bhat