“The way to stop discrimination on the basis of race is to stop discriminating on the basis of race”. –SCOTUS Chief Justice John Roberts
Fair lending is no joke
Please pardon my sophomoric double entendre headline, but for as long as I have been involved in mortgage banking[1]the biggest single compliance management concern has been how to measure and manage fair lending. Fair lending investigations and lawsuits are some of the most expensive and difficult to defend of any consumer compliance issues. The negative publicity alone can be devastating even if claims are settled or investigations are concluded without adverse findings publicized. Getting tagged with a discrimination complaint is akin to being called a racist and no mortgage lender (or company) wants that. In that regard, many of my readers are looking for me to assess and explain the implications of the recent blockbuster $22 million fair lending settlement involving Philadelphia based, non-bank mortgage lender, Trident Mortgage Company[2]. I’ll get to my thoughts shortly, but first some throat clearing on this very sensitive and important issue at the intersection of law, morality and social interactions.
Discrimination is bad (and illegal)
Although I’m a lawyer and mortgage compliance professional who comments on laws, regulations and regulatory actions, I’m going to level set my fair lending discussion with a moral statement that I expect all my readers to agree on: intentionally discriminating against[3]someone based on their race[4]is bad. In fact, if you don’t agree with that, you cannot be my friend.[5] Beyond that moral issue, however, laws enacted more than 50 years ago by Congress, such as the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) along with many state laws have also made discrimination against someone based on race in the housing arena illegal. So, I start this Musing from the premise that discriminating against someone in mortgage lending based on race is not just morally and socially unacceptable, but it’s also illegal[6].
Trident settles
On July 27, 2022, CFPB and the US Justice Department announced their fair lending settlement with Trident including a Complaint filed in court supporting an agreed Consent Order. The attorney generals of Pennsylvania, New Jersey, and Delaware also entered into similar settlements with Trident relative to alleged violations of state law. Virtually every comment made by the various state and federal prosecutors involved clearly identified redlining as the illegal discriminatory conduct. The government views Trident’s redlining as intentional discrimination and evidence of systemic racism in general[7]. Notably, however, UDAAP was not articulated as a basis for the Complaint notwithstanding the recent controversial addition to CFPB’s exam manual about that.
What exactly did Trident do that supported the government’s discrimination claims? As highlighted by the CFPB’s press release:
1) Trident’s employees shared racist and insensitive emails about people and neighborhoods.
2) Trident avoided minority neighborhoods by locating only 2 offices of 53 in majority minority neighborhoods.
3) Trident’s marketing campaigns and advertisements failed to include minority models or employees and targeted mostly majority white neighborhoods.
According to the Complaint these actions, “have discriminated against and discouraged applicants and prospective applicants in majority-minority neighborhoods and high-minority neighborhoods in the Philadelphia MSA from applying for and obtaining home loans and other mortgage-related services. The only evidence the Complaint offered in concluding that these actions (inactions?) actually discouraged applicants was the disparate results of the government’s peer[8]lending analysis for Trident.[9]
What is illegal discrimination?
To analyze the Trident settlement, one needs to understand the various types of fair lending discrimination theories that have been developed over time. While there has been virtually no judicial interpretation of what exactly constitutes illegal fair lending discrimination under FHA and ECOA beyond individual or class based disparate treatment claims[10], the government has pursued several theories in its enforcement actions over the years that compliance professionals can observe and must consider. In addition to concerns about disparate treatment (intentional discrimination), the government has pursued and obtained settlements with respect to disparate impact[11]and redlining. As I will explain below, while styled as a redlining case, Trident really represents a new and different theory that combines elements of redlining, disparate impact and classic disparate treatment discrimination as well.
Starting with the Townstone case, the government has pursued this new theory of fair lending discrimination styled as redlining and distinguished from disparate impact, but using disparate impact analysis as its premise to prove discouragement under ECOA. As I best I can tell, this new theory contains different elements for what constitutes discrimination from traditional redlining and bootstraps disparate impact into intentional discrimination in a way that it still seems to be important for the government to also allege racial animus in addition to disparate impact.[12]
This is clearly a high priority for the Justice Department and CFPB as echoed in the announcement about the settlement with Trident. According to US Attorney General Merrick Garland,
“Last fall, I announced the Department’s Combatting Redlining Initiative and promised that we would mobilize resources to make fair access to credit a reality in underserved neighborhoods across our country,…, As demonstrated by today’s historic announcement, we are increasing our coordination with federal financial regulatory agencies and state Attorneys General to combat the modern-day redlining that has unlawfully plagued communities of color.”
Meanwhile, Paragraph 76 of the Trident Complaint reads as follows: “Trident had no legitimate, non-discriminatory reason to originate so few loans from these areas.”[13] Based on the factual allegations against Trident, that Paragraph 76 seems to signal for me the government’s position about what the Attorney General calls “modern-day redlining”.
What is illegal redlining?
Redlining has generally been recognized as a form of disparate treatment. For example, last year the FDIC’s consumer compliance exam manual described redlining as,
“a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located.” [emphasis added]
Later in 2021, the Justice Department’s announcement about its Combatting Redlining Initiative, however, (re)defined redlining as,
“an illegal practice in which lenders avoid providing services to individuals living in communities of color because of the race or national origin of the people who live in those communities.” [emphasis added]
Deconstructing the new fair lending theory
Those are two very different definitions of redlining. The Justice Department’s definition outlaws not doing something (avoiding providing services) while the FDIC’s focuses on doing something (such as providing unequal access and terms). I don’t know if a court will agree with the government’s interpretations[14], but my blunt reading of the allegations against Trident is the government interprets the failure of a lender to seek (and obtain) racially equitable outcomes as illegal discrimination under FHA and ECOA. That is, when it comes to ECOA, “avoiding encouraging applicants” means the same thing as “discouraging applicants”. Accordingly, “modern-day redlining” means mortgage lenders have an affirmative responsibility to ensure equitable outcomes in their lending and the failure to seek and obtain such outcomes constitutes illegal discrimination. Since the late 1970’s, depository banks have had to meet the community lending tests of the Community Reinvestment Act (CRA)[15] but it would now seem those requirements are being extended to all lenders without guidance about how to determine an assessment area or peer group by which to measure against.
Regulation by enforcement again
Despite it being applied in hindsight against Trident, the government’s current position in the Trident settlement should not come as much of a surprise. CFPB told us all about it a year ago in their Summer 2021 Supervisory Highlights and I discussed it in detail last July when I mused about compliance professional anxiety over regulation by enforcement (one of the most popular Mortgage Musings of 2021!). Still, Trident’s fair lending settlement provides another conspicuous example of why compliance people find fair lending enforcement actions to be largely unhelpful to compliance efforts because guidance from enforcement never seems to have the kind of clarity that Richard Cordray touted was in his enforcement actions when he was CFPB Director.
Compliance people like checklists and objective standards. That way, they can measure and enforce compliance. They are not trained in how to set policies to achieve equitable outcomes.[16] Give them the rules and they will make sure they’re followed. Rules such as TRID, HMDA and servicing rules are detailed and complex, but prescriptive rules like those are manageable with systems and controls. Unfortunately, just as we had in the PHH case with RESPA, we have (i) an opaque theory of compliance liability, (ii) applied without due process to events occurring before the theory was articulated, by (iii) regulatory interpretation outside of formal rulemaking or legislative process. Unfortunately, with Trident Consent Order, we will not have judge confirming that the government’s interpretation is valid-only that the settlement is approved.
All fair lending enforcement actions can tell you, on the other hand, is that fair lending compliance (not unlike RESPA’s anti-kickback provisions) is an exercise in how well you can tell your story (narrative)[17]. For example, consider the company I noted in footnote 6. I can’t imagine that the CFPB or Justice Department would take issue with Ben Slayton’s Legacy Home Loan business plan which is expressly focused on marketing to Black people for the purpose of bridging the homeownership gap. Still, the lack of any guidance on that in light of the facts asserted against Trident as discriminatory is highly unsettling for any mortgage company seeking to serve a disadvantaged group (or any compliance professional seeking to provide guidance to a client about that).[18]
So why did Trident settle?
If the government’s theory is so subject to challenge, why would Trident settle, especially when it had already shuttered its lending activities and Townstone is fighting virtually the same issues with at least a decent chance of a favorable decision? Perhaps there were other considerations for its owners, but if the government wanted to go after a real estate company directly for discrimination claims, the FHA gives them that authority. Of course, only Trident and its counsel know its motivations for settlement.[19]
Morality, law and fairness
I’ll finish with another quote that I find compelling but carries much less force of law than Chief Justice Roberts’ quote earlier.
“Equality before the law, regardless of class, color, or creed, is not just the only answer that has worked for the greater good over the long run, it’s also the only solution with any moral authority.” –Jonah Goldberg
[1] My very first introduction to mortgage banking was the 1994 MBA Legal Issues Seminar: an annual conference I have not missed attending since.
[2] Trident is no longer in business but is a wholly owned subsidiary of the real estate company, Fox & Roach LP, which is owned by Home Services of America, Inc. which, in turn, is owned by Berkshire Hathaway, Inc. Billionaire Warren Buffet is CEO of Berkshire Hathaway.
[3]Discriminating in favor of someone based on race is happening all over the place today (employment, higher education admissions, etc.) This is mostly in favor of minorities, but not always. There are legitimate arguments on both sides as to whether favoring minorities is good or bad, but the question of whether such favoring is legally permitted (affirmative action) continues to be debated by the courts and is likely to be addressed again in the next Supreme Court term in the Harvard admissions case. Justice Roberts quote above is probably all you need to know about how that case is likely to turn out.
[4]Discriminating against someone based on characteristics other than race can also be bad (and sometimes illegal), but I’m just going to focus on racial discrimination in this edition as it is the topic of the Trident settlement and the biggest issue for lenders generally.
[5]Not that all my readers are my friends, but, really, if you are a racist, please unsubscribe.
[6] By no means whatsoever do I think that there is anything wrong or illegalwith a mortgage company whose primary business model is to seek business with certain minority groups, such as Ben Slayton’s Legacy Home Loan division of Panorama Mortgage Group, LLC, (PMG) that is focused on Black home lending. PMG also has a Latino focused division (Alterra) and other divisions focused on certain communities. None of those divisions discriminate “against” white people or on any other prohibited basis, but they focus their advertising, marketing, hiring and office locations decisions around serving the needs of those minority groups who historically were (and presently are) underserved and underrepresented in homeownership. That’s not discrimination against anyone.
[7] For example, Pennsylvania Attorney General (and aspiring governor) Josh Shapiro said, “This was systemic racism, pure and simple,” adding that Trident “denied mortgage access, lending and opportunities to build wealth.” Meanwhile, Kristen Clarke, an assistant attorney general in the Justice Department’s civil rights division, added, “This settlement is a stark reminder that redlining is not a problem from a bygone era. Trident’s unlawful redlining activity denied communities of color equal access to residential mortgages, stripped them of the opportunity to build wealth and devalued properties in their neighborhoods.”
[8]Critically, neither the Complaint nor Consent Order identifies the peer group to which Trident was compared. Not only does that lack of transparency offer no guidance to other lenders seeking to identify their own peers for compliance purposes, but also raises the question as to whether the government put its “finger on the peer lender scale” by including local lenders with CRA obligations to make Trident look worse by comparison.
[9] The Complaint also did not address whether minorities in majority white neighborhoods were similarly discouraged by Trident’s activities from making applications or obtaining loans.
[10]These typically involve denials and pricing issues demonstrated through matched-pair testing or mystery shoppers.
[11]Disparate impact relates to a seemingly neutral policy that has a discriminatory impact without a business necessity for the policy. This theory of discrimination has been limited by recent court decisions and has been discussed in previous Musings (see, e.g., https://mortgagemusings.com/f/ed-14-fair-lending-complexity-and-disparate-impacts-impact)
[12] Both the Townstone and Trident complaints contain specific allegations of racial bias in communications. This attention to intent brings to mind my March 2022 Musing about mens rea and intent with respect to RESPA.
[13] “No legitimate, non-discriminatory reason…” Yet, the Complaint itself notes that Trident was a wholly-owned subsidiary of Fox & Roach, LP Realtors, and had located offices and directed marketing to serve Fox & Roach’s agents and customers. So, apparently, that’s not a legitimate non-discriminatory reason per CFPB and Justice. See also fn.19 below.
[14] Based on early reports about a Hearing held on August 10 before the federal court judge in the Townstone case, however, we might find out soon.
[15] Federal Reserve Board – History of the CRA
[16]As I have noted in these Musings previously, unlike freedom, equity (justice) is always in the eye of the beholder and most people would rather have progress than simply equality. See e.g., https://mortgagemusings.com/f/edition-10-jerry-levy-and-perspectives-on-freedom-justiceand https://mortgagemusings.com/f/ed-25-peaky-blinders-and-more-wholesale-respa-trouble
[17]This may be why the government emphasizes emails and other statements to demonstrate discriminatory intent in both Townstone and Trident.
[18] The government can’t couldn’t possibly be simultaneously saying if you are part of the solution, you also are the problem,…, could they?
[19] I do wonder, however, about the prosecution’s view of the fair housing implications of realtor business strategies and affiliated business arrangements between lenders and realtors generally. Perhaps it’s something like this scene from A Bug’s Life?