Subprime Lenders Under Fire

The charges are serious and the legal complaint doesn’t mince words. In July, the NAACP filed a lawsuit charging a dozen lenders with “institutionalized systematic racism.” This comes as the subprime mortgage crisis heats up — with 2 million foreclosure filings expected this year — which has led several major lenders and two billion-dollar hedge funds to file for bankruptcy protection. Daily developments related to the subprime meltdown increased volatility in the stock market, leading to a string of triple-digit swings in the Dow Jones industrial average.

“It’s important to us as an organization,” says Angela Ciccolo, interim general counsel for the NAACP in Baltimore, “because when our community pays higher rates of interest for a home, that’s money that can’t be spent on college education, business development, or other costs of living.” The NAACP’s primary assertion is that in 2004, African American homeowners who received a subprime mortgage from the defendants were more than 30% likely to be issued a higher-rate loan than white borrowers. The lenders named in the suit include Accredited Home Lenders Inc., Ameriquest Mortgage Co., BNC Mortgage Inc., Citigroup Inc., Encore Credit, First Franklin Financial Corp., Fremont Investment & Loan, HSBC Finance Corp., Long Beach Mortgage Co., Option One Mortgage Corp., Washington Mutual Inc., and WMC Mortgage Corp.

The rise in the number of subprime foreclosures stems, at least in part, from the fact that most of these loans are adjustable rate mortgages and many borrowers are just now facing their first interest rate reset. Such loans often offer low teaser rates up front. “The rate could be 6% or 7% on the front end,” says Keith Corbett, executive vice president of the Center for Responsible Lending in Durham, North Carolina. “Then in two or three years, that rate could go as high at 12%. And in most cases, it did.”

To document widespread lending disparities, the NAACP cites several studies, among them, the recent findings of two nonprofits: the Center for Responsible Lending and the National Community Reinvestment Coalition. Both organizations found that African American borrowers were more likely to receive higher-cost loans, even when income and credit risk were accounted for. Perhaps most notably, the Center for Responsible Lending found that 52% of the loans made to African American borrowers in 2005 were higher-cost subprime loans, compared to 19% for white borrowers.

The complaint was filed as a class action and the NAACP is in the process of identifying individual plaintiffs to represent the class. Ultimately, the courts will decide if the suit can properly be brought as a class action — the individual’s claims must be typical of the group as a whole and there must be some common defenses for the defendants. Some legal experts feel that this may be a challenge for the NAACP. “Frankly, it will be very hard for a court to frame injunctive relief under the very broad mandate that they are seeking,” says John Coffee, a professor at Columbia Law School in New York City. “This is likely to become a battle