Fair lending now

Bank of America (BofA) has reached a $335 million dollar fair-lending settlement with roughly 200,000 victims of discriminatory mortgage-lending practices perpetrated by Countrywide. The settlement is the largest on record for a fair-lending suit. [For more information on settlements reached by BofA, see the July 2011 first tuesday article, Payday cometh . . . for BofA’s investors.]

Countrywide was accused of charging minority borrowers higher fees than their equally qualified white counterparts and systematically discriminating against these borrowers by steering them into subprime mortgage products despite their relatively strong credit histories.

Now that the dust has settled, the Department of Justice (DOJ) is facing an unexpected challenge: finding the 200,000 individuals who have been displaced by foreclosure due to discriminatory lending practices. Many of the victims have moved several times and live with family members in multigenerational homes, thus having no permanent address of their own.

Although the DOJ has vowed it will locate all of the victims, whatever monies are not dispersed will be distributed to nonprofit organizations that provide housing and mortgage counseling in minority communities.

first tuesday take: Real estate brokers, agents, mortgage loan brokers and attorneys take note: this is a landmark settlement that has set a precedent for the impending wave of lender/borrower litigation. Of the number covered, around 25,000 would be California’s prorated share of families involved.

Yes, BofA settled, thus avoiding the steep cost of litigation and the inevitable backlash of public reproach for Countrywide’s despicable actions had the facts been given the scrutinizing sunlight of litigation. However, being the largest sum in history for a fair-lending settlement, first tuesday predicts this has merely set the tone for many more litigious disputes to come between jilted borrowers and red-handed lenders.

Of course, lending discrimination based on race and ethnicity is only the beginning of this epic tale of good vs. evil, a modern-day Greek tragedy. The true form of discrimination that underlies all of the victims in the Countrywide suit, and involves millions more all across the country, is the profitable discrimination against the financially illiterate.

The reason why this discrimination is so pervasive today is that the financing instruments used to fund the creation of homeownership are so complex and have strayed so far from fair-lending fundamentals that the deck is stacked against anyone without a finance degree or experience on Wall Street. [For more information on the financial illiteracy epidemic, see the September 2010 first tuesday article, The era of the financially illiterate homebuyer.]

In part, this is the fight that those involved in Occupy Wall Street (OWS) have taken up, and this is the nature of the fight real estate brokers and agents need to join. The first step to a new age of fair housing is education about what constitutes a fair deal when negotiating with lenders.

Real estate brokers and agents are educated in these matters by law and duty-bound to share this expertise with their clients.

More universally, you are the self-chosen gatekeepers to homeownership and must do everything in your power to inform homebuyer-clients of the risks and repercussions involved in financing the purchase of a home with a subprime loan/adjustable rate mortgage (ARM). [For a quiver of tools to educate you clients about negotiating a home loan, see the May 2011 first tuesday article, Financially illiterate homebuyers in distress — agents to the rescue!]

Going forward, it is of chief importance to the mobility of sellers and real estate titles (read: sales volume) that you educate all clients about the existence of the due-on-sale clause in all trust deeds. Mortgages originated today at historically low interest rates will turn into acrimonious disputes in the near future of inevitably rising interest rates. The due-on time bomb lies dormant now, but it is only matter of time before it is detonated as interest rates tick up ­— and they will tick up.  [For more information in the coming age of due-on enforcement, see the January 2012 first tuesday article, The due-on time bomb.]

re: “Victims sought in Countrywide case” from the Wall Street Journal