ueorgetown Journal on t"oveny Law 61: t"OllCY
Volume VI, Number I, Winter 1999
NOTES
Using the Fair Housing Act to Combat
Predatory Lending
Frank Lopez*
In this article, Frank Lopez examines various solutions to the widespread
problem ofpredatory lending. Because minority borrowers are shut out from
mainstream lending institutions, predatory lenders can make loans with exorbitant rates and excessive closing costs to low-income borrowers. These high
costs often force borrowers into default, allowing lenders to foreclose on their
homes. The Article first discusses the evolution and consequences of predatory lending in poor minority communities. Next, the article discusses several
legal options that have been offered as a means to combat predatory lending,
including: the Community Reinvestment Act, the Truth in Lending Act, the
Civil Rights Act of 1866, and the doctrine of unconscionability. The Article
makes a thorough examination of these options, finding that each is inadequate to the task of deterring predatory lending practices. Ultimately, Lopez
concludes that the Fair Housing Act is the most effective means to combating
predatory lending.
CONTENTS
I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROBLEM PRESENTED. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1lI. CURRENT LEGAL OPTIONS
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MOST VIABLE VEIllCLE FOR CHANGE. . . .
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A. General Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Broad Construction ofthe FHA. . . . . . . . . . . . . . . . . . . . . . . .
92
93
A. The Community Reinvestment Act . . . . . . . . . . . .
B. Truth in Lending Act. . . . . . . . . . . . . . . . . . . . . .
C. Doctrine of Unconscionability. " . . . . . . . . . . . ..
D. Civil Rights Act of 1866: Sections 1981 and 1982 .
IV. FAIR
HOUSING ACT:
THE
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* J.D., Georgetown University Law Center, 1999; B.S., University of Florida, 1996. I would like to
thank Peter Edelman, a professor at Georgetown University Law Center, and John ReIman, an attorney
at the Washington Lawyers' Committee for Civil Rights, for their insightful contributions. Further, on a
personal note, I want to thank my wife Jennifer for her daily guidance and my parents for their
continuing support.
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Georgetown J oumal on Poverty Law & Policy
[Vol. VI
No. I]
C. Distinctive Competencies ofthe FHA in Reverse Redlining
Cases. . . . . . . . . . . . . . . . . . . . . .
1. Standing. . . . . . . . . . . . . . . . . .
2. Multiple Causes ofAction. . . . .
3. Potential Remedies. . . . . . . . . .
4. Continuing Violations Doctrine.
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V. CONCLUSION.. . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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I. INTRODUCTION
Our country has made great strides in curtailing racially discriminatory
practices over the past thirty years. However, disparate treatment continues
within the mortgage lending industry. Low-income minorities often do not have
the same opportunities as white persons to obtain loans from mainstream
lenders. Consequently, minority borrowers are often vulnerable to predatory
lenders, who take advantage of minorities' limited borrowing options by charging egregious interest rates and forcing them into foreclosure.'
In Part II of this article, I describe a predatory lending practice known as
reverse redlining in which lenders make loans to disadvantaged borrowers at
exorbitant rates, 2 with excessive closing costs, 3 and with other provisions that
greatly increase the cost of the loan to the consumer.' The lenders either make
1. Although this article focuses on the legal alternatives available to minority victims of predatory
lending, it is important to note that other groups have become targets of similar practices. Many elderly
borrowers are also systematically and fraudulently schemed out of the equity in their homes. Jean
Reilly, Reverse M011gages: Backing into the Future, 5 ELDER L.J. 17, 17 (1997). Further, women's
groups contend that banks discriminate against women by imposing harsh requirements on female
applicants, causing them to suffer grave financial burdens. ROBERT SCHAFER & HELEN F. LAnD,
DISCRIMINATION IN MORTGAGE LENDING 5 (1981).
2. While interest rates appropriately vary based on the extent of the risk and other tenus of the loan,
an interest rate of 12% or more is generally considered eJ):cessive. See generally Predatory Lending
Practices: Hearings Before the Senate Special Comm. on Aging, CONGo TEsTIMONY, Mar. 16, 1998, at
80, available in 1998 WL 8993162 (statement of William J. Brennan, Jr., Director of the Home Defense
Program of the Atlanta Legal Aid Soc'y) [hereinafter Testimony of William J. Brennan, Jr.]. Congress
has sought to control "consumer credit transaction[s] secured by the consumer's principal dwelling"
(as opposed to residential mortgages) by requiring new lender disclosure provisions. See Home
Ownership and Equily Protection Act of 1994 § 152(a), 15 U.S.C. § 1602{aa) (1994). The Home
Ownership and Equity Protection Act defines high rate mortgages (which are hence subject to
regulation) as those with annual percentage rates of "more than 10 percentage points the yield on
Treasury securities," or those with total fees and points exceeding 8% of the loan or $400, whichever is
higher. 15 U.S.C § 1602(aa)(1). If the current rate for a 10-year Treasury bill is 7.5%, therefore, a
"high cost" loan would be considered 17.5%. See M~ry Sit, Some New Protection on Homeowner
Loans, BOSTON GLOBE, Oct. 16, 1994, at AI.
3. The closing costs involved in abusive loans may be two or three times those charged middle
income homeowners. Real Estate Settlement Act Truth in Lending Act, CONGo TESTIMONY, Sept. 16,
1998, available in 1998 WL 18089596 (statement of Margot Saunders, Managing Att'y, National
Consumer Law Center) [hereinafter Testimony of Margot Saunders]. [Editor's note: Pagination for
Testinwny ofMargot Saunders was not available at the time of pUblication.]
4. In addition to high interest rates and excessive closing costs, abusive lenders often increase the
~
I
Predatory Lending
75
substantial profit off the loan repayments, or drive borrowers into default,
acquiring their homes at foreclosure 5 Part ill explores the various legal options
that have been used to combat predatory lending, including the Community
Reinvestment Act, the Truth in Lending Act, the doctrine of unconscionability
and the Civil Rights Act of 1866. For each option, the history and goals are
presented, followed by an analysis of the specific deficiencies that make them
inadequate to deter predatory lending practices. Finally, Part IV posits the Fair
Housing Act as the most viable legal option for combating predatory lending.
This section highlights the distinctive competencies of the FHA, such as its
broader standing requirement, multiple causes of action, strong remedial potential, and continuing violations doctrine.
i>
II.
t
PROBLEM PRESENTED
Historically, minorities in low-income neighborhoods have not had the same
opportunities to obtain mortgages as white consumers in middle- and upperincome neighborhoods. In the 1960's, banks began engaging in a practice
known as redlining, circling minority and low-income communities with red ink
to indicate areas of the map upon which a general denial of credit would be
enforced. 6 Sadly, progress in reducing lending discrimination has been slow.
Today, minorities in low-income areas still have few, if any, options in the
conventional mortgage market. 7 During 1995, financial institntions rejected
black mortgage applicants at twice the rate of white applicants. s The rate of
rejections for home mortgage applications was 40.5% for blacks, 29.6% for
Hispanics, and 20.6% for whites. 9 Furthermore, mainstream financial institnborrower's costs by incorporating loan flipping and balloon payments into the tenus ,of loans, and
selling overpriced life and disability insurance (a practice mown as "insurance packing"). See
Testimony of William J. Brennan, Jr., supra note 2, at 85-86. Credit insurance packing, generally
pre-paid, can add thousands of dollars to the costs of loans, and such insurance could be more
reasonably obtained if paid on a monthly basis. See Testimony ofMargot Saunders, supra note 3.
5. See Julia Patterson Forrester, Mortgaging the American Dream: A Critical Evaluation of the
Federal Govemment's Ptonwtion of Home Equality Financing, 69 TuL. L. REv. 373, 390 (1994)
[hereinafter Forrester, Mortgaging the American Dream] (explaining that predatory lenders often make
loans without concern for the borrower's ability to repay-monthly payments may exceed two-thirds of
the borrower's monthly income). Predatory lending is premised not on ability to repay, but on
foreclosure.Id.
6. Stephen Trzcinski, The Economics of Redlining: A Classical Liberal Analysis, 44 SYRACUSE L.
REv. 1197, 1199 (1993). Redlining has been defined as the practice of discouraging mortgages and
improvement loans, andlor the imposition of unfavorable borrowing tenns upon home owners and
businesses, on the basis of race or ethnicity. THOMAS P. FITCH, DICTIONARY OF BANKING TERMS (1990).
7. See Kenneth R. Harney, Your Mongage: New Bills Restrict "High Cost Mortgages, "L.A. TIMEs,
Nov. 14, 1993, at K4 (indicating that high interest mortgages are among the few borrowing options for
low-income persons, and that prop'osals to eliminate such mortgages, while controlling "reverse
redlining," would significantly limit borrowing options).
8. See Judith Evans, HUD Expands Access to Minority Loan Data, WASH. POST, Aug. 3, 1996, at El.
9. [d. These numbers have improved somewhat. In 1997, banks made 14.58% of their loans to blacks
and Hispanics-blacks and Hispanics make up 17.06% of the population. In 1994, banks made only
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tions are frequently inaccessible to minonues since these institutions rarely
have branches in minority neighborhoods and require complicated loan processes that can be overwhelming to low-income borrowers.!O
Despite the failure of mainstream banks and mortgage lenders to extend
credit to minorities, home equity lending has grown explosively over the past 10
to 15 years. Home equity loans have historically been a privilege of the
middle-class and wealthy, who generally have high credit ratings, income, and
home equity." Beginning in the middle to late 1980s, however, finance companies '2 entered the subprime mortgage lending fray, and targeted lower-income
communities, which were not served by mainstream lenders. 13 People in these
communities typically have little disposable income, but often have substantial
home equity as a result of paying down their mortgages or simply through the
appreciation of their property values. '4 This equity can secure sizable loans.
Unfortunately, persons in these communities often have limited disposable
income and are thus unable to repay large loans. IS While offering loans to
minorities has great potential to benefit minority communities, reverse redlining
practices have milked the last drops of wealth from minority neighborhoods,
leading to increased poverty and public dependence. '6
13.55% of their loans to these minority groups. Mark Anderson, Subprime Lending to Minority Groups
Rises, Study Finds, WALL ST. J., Nov. 25, 1998, at BU.
10. Forrester, Mortgaging the American Dream, supra note 5, at 421.
11. Glenn B. Canner et al., Recent Developments in Home Equity Lending, 84 FED. RESERVE BULL.
No.4, Apr. 1, 1998, at Z41, available in 1998 WL 15642011 ("Before the mid-1980s, nearly al.l home
equity borrowing was of the traditional type.").
12. Finance companies, for the purposes of this paper, are non-depository lending institutions.
Commercial banks, savings banks, savings and loan associations, and credit unions, on the other hand,
are depository institutions. Canner, supra note 11 (setting forth this definition).
13. Today, subprime mortgage originations are far-outstripping growth of the mortgage lending
business in general. In 1997, subprime mortgage l0a.Il:s i?creased by 39%, compared with only 8% for
all mortgages. Whereas subprime mortgages made up only 10% of total mortgage originations in 1995,
they made up over 20% in 1998. Seth Lubove, Willing Lender ofLast Resort, FORBES, Nov. 16, 1998, at
50. See also Testimony of William J. Brennan, Jr., supra note 2, at 88. Mr. Brennan, in his capacity as
the Director of the Home Defense Program of the Atlanta Legal Aid Society notes:
My impression is that today, in the low and moderate income where our clients live, the
penetration by subprime predatory mortgage lenders has been enonnous. It appears that
virtually every other house in these neighborhoods is burdened by a predatory mortgage
loan. . .. [L]egal services programs around the country report dramatic increases in these
types of cases.
!d. See also Canner, supra note 11 ("[A] new element has given a sharp boost to overall growth in
home equity lending over the past couple years, and that is the vigorous marketing by nonbank lenders
to the "subprime" segment of the market-.......hom.eowners with relatively low incomes, limited equity, or
tarnished credit histories.").
14. See Stephen F. J. Ornstein, Examining the Effect ofNew Legislation on Consumer Protectionfor
"High Cost Mortgages," 25 REALEST. L.J. 40, 42-43 (1996).
15. Id. This practice is also mown as "equity skimming." See also PROBLEMS IN COMMUNITY
DEVELOPMENT BANKING, MORTGAGE LENDING DIsCRIMINATION, REVERSE REDLD'IING, AND HOME EQUITY
LENDING: HEARINGS BEFORE THE SENATE COMM. ON BANKlNG, HOUSING, AND URBAN AFFAIRS, S. REP.
No. 103-169, at 22 (1993), reprinted in 1994 U.S.C.C.A.N. 1881 (statement of Bruce Marks, Executive
Director, Union Neighborhood Assistance Corp)).
16. Testimony of William J. Brennan, Jr., supra note 2.
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•
With these facts in mind, I use "reverse redlining" to refer to lending
practices that target minority communities, employing interest rates and fee
scales that are significantly higher than those prevailing in white communities. 17
This definition includes abusive practices by companies that lend to both white
and minority communities (through branch offices of their parent corporations,
sister corporations, or subsidiaries)!" and companies that lend primarily to
minority communities!9
Creditors are able to use reverse redlining practices successfully because
credit-starved minority communities have little access to traditional sources of
credit-in a very real sense, reverse redlining is the "logical complement" of
redlining. 20 When vulnerable persons fall behind on property taxes, incur
substantial medical costs, suffer sudden loss in income, require credit consolidation, or need funds to maintain their homes, predatory lenders 21 step in, offering
loans secured by the borrower'seqnity. While home equity loans are very risky
for homeowners, who face losing their homes if they fail to make their loan
payments, they are not particularly risky for the lenders. In fact, the lender is in
a win-win situation with these home equity loans: either the borrower pays the
exorbitant interest rate or the lender forecloses. 22 With property values appreciat17. Cf Testimony of Margot Saunders, supra note 3, at n.9 (defining the practice (differently) as
making "loans at one rate in white communities through their banking ann and at another higher rate in
communities of color through separate finance company subsidiaries").
18. In Alexander v. Fleet Finance, Inc., for instance, Fleet Finance targeted African Americans in
Georgia for high interest rate mortgage loans (sometimes exceeding 30 percent), while its parent
corporation, Fleet Bank, offered loans to white communities on dramatically more favorable rate scales.
Fleet Finance settled the case for $18 million. Alexander v. Fleet Finance, Inc., No. 91-RCCV-681
(Richmond Cty., Ga. Sup. Ct Aug. 20, 1991).
19. In United States v. Long Beach Mortgage Co., the Long Beach Mortgage Company, which lends
primarily to persons with blemished credit, used its employees and brokers to implement its sub-prime
lending business. The company employed a base price list that corresponded with the borrower's risk,
but pennitted its brokers and etpployees to propose -loan prices which exceeded the price list. The
difference between the negotiated price and the price list was kept by employees and brokers as
compensation. The Department of Justice contended that this loaning practice was carried out in a way
in which African Americans, Hispanics, women, and the elderly were charged higher rates than others,
and thus was in violation of the Fair Housing Act and Equal Credit Opportunity Act. Long Beach
entered into a consent decree, requiring it to establish a $3 million fund to reimburse the 1,200
identified victims of discrimination, and spend $1 million on educational programs to teach consumers
how to shop for an appropriate loan. United States v. Long Beach Mortgage Co., No. C.A. 96-6159DT
(CWX) (C.D. Cal., Sept. 5, 1996). See also Long Beach Lender to Pay $3 Million for Allegedly
Charging Higher Rates to African Americans, Hispanics, Women and the Elderly (U.S. Dep't of Justice,
Civil Rights Div., Washington, D.C.), Sept. 5, 1996 (visited Feb. 13, 1999) <http://www.usdoj.gov/opal
prIl996/Sept96/429cr.htm>.
20. In fact, it is not surprising that many mainstream banks that employ redlining practices are also
involved in reverse redlining. These mainstream banks often own, lend money to, or purchase loans
from finance companies engaged in reverse redlining. Testimony of William J. Brennan, Jr., supra
note 2.
21. In addition to finance companies, home improvement contractors are known to extend credit in
this manner. Mortgage brokers are also players in the reverse redlining practice. Brokers solicit
borrowers for lenders, and are paid a "yield spread premium." This premium is directly proportional to
the mark-up over list price that the broker is able to secure. Testimony oj Saunders, supra note 3, at 86.
22. Forrester, Mortgaging the American Dream, supra note 5, at 391 (quoting Adding Injury to
L VVI.
V
~
ing, there is little chance tlmt a foreclosure sale will not produce sufficient
revenue to repay the high fees and principle of the 10an.23
In addition to the unfairness of the lending terms, tl,e manner in which
predatory loans are solicited is disturbing. Upon finding a likely target for a
predatory home mortgage or home improvement loan, the contractor, lender, or
broker often resorts to high pressure tactics to induce the homeowner to enter
into the contract. Predatory lenders may solicit door-to-door or may repeatedly
call people at their homes to encourage them to accept the contract. Homeowners in poor black areas of Atlanta describe the behavior by lenders as "trolling
for customers.,,24 The contact is so persistent that many residents refer to the
solicitors as "bird dogs."25 In some cases, the lenders encourage homeowners
to sign loan documents without reading them or with key terms left blank?6
Until recently, these practices were confined to small, local lenders, but a
growing number of large institutioual lenders are now engaging in the practice
as wel!.27
In many ways, a cause of action for predatory lending may seem counterintuitive: the lender would be punished for providing mortgage loans to minorities
who historically have been denied credit. Iu addition, lenders contend that the
high rates are justified because of the high risk in making loans to less
creditworthy borrowers?8 It is understandable that any business establishment
which subjects itself to increased risk must employ pricing policies that "will
afford a degree of protection commensurate with the risk. ,,29 Further, there are
sound reasons from a lender's perspective for requiring a lien: the home
provides an alternate source of payment in the event that the borrower defaults,
and the risk of losing the home provides an incentive for the borrower to avoid
default. 30
However, the problem is not that these institutions are making loans, but
rather, that the terms of those loans are so unreasonable as to suggest an intent
1"1U. 1J
•
•
•
•
•
,
Injury: Credit on the Fringe: Hearings Before the Subcomm. on Consumer Credit and Insurance of the
House C01mn. on Banking, Finance and Urban Affairs, 103d Congo 2 (1993) (statement of Steven D.
Caley, Atlanta Legal Aid Soc'y)).
23. Testimony ofMargot Saunders, supra note 3.
24. Jill Vejnosjka, Lenders Prey on Unwary 2nd Mortgages Often Put Borrowers in Poor House,
ATLANTA CONST., Oct. 11, 1992, at AI.
25. [d.
26. Julia Patterson Forrester, Constructing a New Theoretical Framework for Home Improvement
Financing, 75 OR. L. REv. 1095, 1099 (1996) [hereinafter Forrester, Constructing a New Theoretical
Framework].
27. See Rob Wells, Fleet Units Lending Practices Under Fire in Georgia, CHI. TRIB., Jan. 10, 1993,
at 1M.
28. Forrester, Mortgaging the American Dream, supra note 5, at 391 n.89.
29. Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 450 (D.C. Cir. 1965) (Danaher, J.,
dissenting).
30. Forrester,_ Mortgaging the American Dream, supra note 5, at 383.
•
rreaaIory Lenmng
''7
to foreclose. Many of the fees and charges added to the loan principle serve no
other purpose than to increase monthly payments. 3l Studies also suggest that the
risk to lenders does not justify the exorbitant interests rates attached to these
loans 32 The myth of higher risk is in large part perpetuated by the lenders'
practice of establishing monthly payments that exceed two-thirds of borrowers'
monthly incomes, making the payments nearly impossible to meet and leading
to a high default rate. 33
The proliferation of predatory lending practices may result in "the social
fabric of many inner-city urban neighborhoods [being] torn apart" and the
further destabilization of minority communities. 34 The loss of a home can be
financially and psychologically devastating. Financially, a homeowner may lose
all equity in his home, and ultimately may end up homeless. 35 Psychologically,
homeowners facing the loss of their homes are more likely to suffer from
mental ilmesses, commit suicide, or engage in climinal behavior. 36 Therefore,
the problem of predatory lending in minority communities is a grave concern.
Despite recognition of the harm predatory lending may inflict upon communities, these practices persist. One reason for the persistence of reverse redlining
practices is that predatory lenders target groups who are among the least likely
to bring a cause of action. Minority homeowners who fall prey to unscrupulous
lending practices may not assert a claim for a variety of reasons. First, the cost
of initiating litigation may be prohibitive. 37 While middle or upper income
homeowners have the resources to retain an attorney to prevent foreclosure, low
income minority homeowners do not 38 A suit to enjoin a foreclosure is unlikely
to produce damages, and is therefore unlikely to warrant an attorney's acceptance of the case on a contingent fee basis. 39 Furthermore, most jurisdictions
require a plaintiff seeking a temporary restraining order or preliminary injunction to post a nonrefundable bond.40 Second, low-income homeowners often do
31. See generally Thomas J. Methvin, Alabamas Poverty Industry, 58 ALA. L. REv. 234, 235 (1997).
32. Forrester, M01tgaging the American Dream, supra note 5, at 391-92 (citing Robert A. Eisenbeis
& Neil B. Murphy, Interest Rate Ceilings and Consumer Credit Rationing: A Multivariate Analysis ofa
Survey of Borrowers, 41 S. BeoN. J. 115, 122 (1974); Maurice B. Goudzwaard, Consumer Credit
Charges and Credit Availability, 35 S. BeoN. J. 214, 217-20 (1969); Charlene Sullivan, Competition in
the Marketfor Consumer Loans, 36 J. BeoN. & Bus. 141, 148 (1984)).
33. [d.
34. Forrester, Mortgaging the American Dream, supra note 5, at 392. (quoting Problems in Commu~
nity Development Banking, Mortgage Lending Discrimination, Reverse Redlining, and Home Equity
Lending: Hearings Before the Senate Comm. on Banking, Housing, and Urban Affairs, 103d Cong, 254
(1993) (statement of Scott Harshbarger, Atl'y Gen., Commonwealth of Mass.)).
35. Forrester, Constructing a New Theoretical Framework, supra note 26, at 1102-03.
36. [d.
37. Forrester, Constructing a New Theoretical Framework, supra note 26, at 1129.
38. [d.
39. [d. at 1129-30.
40. DAN B. DOBBS, LAW OF REMEDffiS 196 (2d ed. 1993). Bven if the plaintiff succeeds, the bond is
not returned. Id.
not realize that a valid defense may prevent the foreclosure. 4l Third, many
homeowners are intimidated by or unfamiliar with the legal process:2
III. CURRENT LEGAL OPTIONS
A significant reason for the persistence of predatory lending has been the
failure to identify a legal framework under which these practices can be
successfully challenged. Congress, states:3 and the COmmon law have created a
number of protections against deceptive and Ullfair lending practices. Often
evolving in different time periods and in the pursuit of disparate goals, each of
these creates a unique cause of action for victims of reverse redlining. Unfortunately, causes of action have not sufficiently reduced the practice of reverse
redlining in low-income, minority communities. This section of the paper will
provide an exploration of the history, goals, practical effects, and potential difficulties
associated with the most common causes of action in reverse redlining claims.
A. The Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires federal bank supervisors to assess how individual depository institutions serve the credit needs of
the "entire community, including low- and moderate-income neighborhoods."44
The CRA was created in response to allegations that lending institutions were
5
engaging in redlining: Redlining was seen as a contributing factor in the
deterioration of minority and urban communities:6 Proponents of the CRA
emphasized the need to preserve local communities and contended that depository institutions could invest in their local communities and still make a profit:?
Congress amended the CRA as part of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989:8 As amended, the Act requires
regulatory agencies to publicly disclose certain findings and conclusions regard41. Forrester, Constructing a New Theoretical Framework, supra note 26, at 1129.
42. !d.
43. See, e.g., United Companies Lending Corp. v. Sargeant, 20 E Supp. 2d 192, 209 (D. Mass. 1998)
(holding that loan fees which "substantially deviate from industry-wide practice" may constitute an
unfair or deceptive trade practice in violation of Massachusetts regulations).
44. 12 U.S.C. § 2903 (1994); see generally Jonathan R. Macey & Geoffrey P. Miller, The Community Reinyestment Act: An Economic Analysis, 79 VA. L. REv. 291, 292 (1993) (analyzing the economic
effects of banks' increased community lending, as encouraged by the CRA, and concluding that the
CRA encourages risky investment, penalizes institutions serving low-income neighborhoods, and
impedes efficient bank mergers, among other effects).
45. Macey & Miller, supra note 44, at 298.
46.Id.
47. Id. at 299.
48. See Pub. L. No. 101-73, §§ 1211-12. 103 Stat. 183, 524-28 (1989) (codified as amended at 12
U.S.c. §§ 2802-07, 2810, 2902, 2906 (1994 & Supp.111996)).
ing lending institutions:9 including whether an instit~tion is meeting co~u­
nity needs. 50 This requirement makes any evidence of disparate lendmg practices
part of the public domain, and "[b]y requiring the publication of ratings, the
amendment subjected the supervisory agencies to polItical pressure from
groups claiming that the agencies were not doing enough to ensure C~
compliance." 51 Further, under the ~RA, federal ~ank regulato~ agencIes
may deny merger or expansion applIcatIOns from Institutions WIth low ~at­
ings. 52 "Thus, any bank that contemplates establishing new branches, acqU1~Ing
other banks, or merging into or being acquired by another bank mnst consIder
the possibility that its business plan will be stymied by an adverse CRA
finding.,,53
Although passed more than twenty years ago, the Act was not activel~
enforced and did not lead to any significant community pressure on banks until
the late 1980s.54 However, the 1989 amendments changed thepolitical dy?au;;
ics of the CRA, leading to greater enforcement by supervIsory agencIes:
Recent studies have given the CRA credit for $61 billion dollars in commumty
investments. 56
Unfortunately, the CRA does not provide a sufficient remedy to the problem
of reverse redlining. A lack of commitinent by regulatory, agencies to aggressively apply the CRA and the banks' common practice of buying loam from
predatory lenders to bolster their lending statistics have severely IItulted the
act's effect. Since its inception, the CRA has been "little more than a vague
statement of principle without much real-world effect,"57 and although enforcement has increased slightly in recent years, punishment is still rare. During the
first ten years of the CRA, only eight of 50,000 bank expansion applications
12 U.S.c. § 2906(b) (1994).
!d. § 2906(b)(2).
Macey & Miller, supra note 44, at 301.
.
"
. . . ,
12 U.S.C. § 2903(a) (1994) (providing that a federal agency shall consider the msti~ution s
record of meeting the credit needs of its entire co~uni~,. including ~ow.- a~d ~oderate-mcome
neighborhoods" in evaluating "an application for a depOSIt facIlity by such Institution. ).
.
53. Macey & Miller, supra note 44, at 300.
54. [d. at 1760 (citing Community Reinvestment Act: Hearings Before the Senate Comm. on Bankmg,
Housing, and Urban Affairs, 100th Congo 204, 209 (1988) (statement of Martha R. Seger, Member of
the Bd. of Govemors of the Fed. Reserve Sys.), reprinted in 74 FED. REsERVE BULL. 30~, 310 (l988~).
55. See Macey & Miller, supra note 44, at 301 (noting that agencies have given theIr lowest ratmgs
to many of the institutions they have examined).
56. Vincent Di Lorenzo, Legislative Heart and Phase Transitions: An Exploratory Study of Congress
and Minority Interests, 38 WM. & MARy L. REv. 1729, 1760 (1997) .ceiting NATIONAL COMMUNITY
REINVESTMENT COAUTION CRA DOLLAR COMMITMENTS SINCE 1977 (1995)).
57. Macey & Miller, s~pra note 44, at 292. The CRA did not originally authorize public disclosure
of bank examiners' findings. Id. at 300. See also Housing and Community Development Act of 1977,
Pub. L. No. 95-128, 91 Stat. 1111, 1147-48 (codified as amended at 12 U.S.c. §§ 2901-2905 (1994))
(CRA did not expressly impose obligations on federal bank regulatory agenCIes, but mstead ~e
agencies merely had to "take into account" a bank's level of community r~investment when evaluating
a bank's application for expansion).
49.
50.
51.
52.
were denied on CRA grounds. 58 From 1989 to 1994, there were only seventeen
denials.'9 In keeping with this pattern of permissiveness, of the 192 applications
protested during 1993 and 1994, only one was denied. 60
Proponents of the CRA may argue that the future of the Act is bright because
the Clinton Administration has recently begun to pressure regulatory agencies to
enforce the fair lending laws more rigorously.6! However, the regulatory agencies' response has not been to support more action, but instead, to urge an
easing of CRA examinations. For example, the Comptroller of Currency has
developed a plan to eliminate some of the more time-consuming requirements
for banks. 62 This will result in less detailed examinations of lending institutions. 63 Further, the Federal Reserve Board has promulgated rules to ease the
burden of the CRA on banks by drafting procedures that allow less detailed
regulatory examinations of bank compliance. 64 Congress has not shown signs of
strengthening the CRA or made any effort to "force the hand" of the regulatory
agencies.
Astoundingly, the requirements placed on banks under the CRA may have
actually enhanced the problem of predatory lending. In order to appear more
58. John R. Cranford, Banks Upset by Tag Price on Deregulation Bill, 46 CONGo Q. WKLY. REp. 796
(1988), available in 1988 WL 2833755.
59. U.S. GENERAL ACCOUNTING OFFICE, Pub. No. GAO/GCD-96-23, COMMUNITY REINVESTMENT
ACT: CHALLENGES REMAIN TO SUCCESSFULLY IMPLEMENT eRA 32 tbl.l.6 (Nov. 1995).
60. [d. at 34 tbl.l.8.
61. See Allen Fishbein, The Community Reinvestment Act After Fifteen Years: It Works, but
Strengthened Federal Enforcement Is Needed, 20 FORDHAM URB. L.J. 293, 308 (1993) ("[T]he new
administration will have an important, perhaps historic, opportunity to enable the eRA to achieve its
full potential. Much of what is needed is tougher, more aggressive enforcement of the existing CRA
law. It is not the lack of laws, but rather lackluster enforcement of the CRA, that has contributed to the
continuance of neighborhood disinvestment and lending discrimination. ").
According to President Clinton, "[s]ince the CRA became law in 1975, 95 percent of all the
commitments made under it have been made since 1993." The President claims that since he has taken
office, the CRA has generated over $1 trillion in new financial commitments. Transcript of CliJlton
Remarks to Mayors Breakfast Reception, U.S. NEWSWlRE, Jan. 29, 1999, available in 1999 WL
4635008. According to other reports, the disparity between loans to whites and minorities is decreasing,
although minorities continue to be disproportionately serviced by sub-prime lenders. 'TWenty-nine
percent of African Americans seek loans from sub-prime lenders, compared with 14% of whites. See
Anderson, supra note 9, at B 11.
62. See Keith Bradsher, Shift Seen in U.S. Stance on Loans in POOl' Areas, N.Y: TIMES, Oct. 31, 1995,
atD1.
63. See !d.
64. See Bank Holding Companies and Change in Bank Control Regulations, 12 C.ER. pt. 255
(1998); see also Banle Holding Companies and Change in Bank Control, 62 Fed. Reg. 9290, 9291
(1997) (final rule) (stating one of the purposes of t1le new regulations as "streamlin[ing] 15-day notice
procedure for proposals by well-capitalized and well-managed bank holding companies with satisfactory or better performance ratings under the Conununity Reinvestment Act of 1977 ('CRA') to acquire
banks and nonbanking companies within certain size limits") (amending 12 C.P.R. §§ 225.1-225.7,
225.11-225.17,225.21-225.28,225.31-225.32, 225.41-225.44); Saul Hansell, Fed Praposal Would Ease
Some Regulations for Banks, N.Y. TIMES, Aug. 24, 1996, at A38 (discussing proposal to streamline the
process for banks to enter new businesses and acquisitions by reducing t1le comment period for smaller
bank mergers, and providing new banks blanket authorization to pursue a variety of business lines,
instead of applying separately for each service).
involved in minority communities, large lenders often purchase the high-interest
loans held by predatory lenders operating in those communities. Representative
Joseph P. Kennedy of Massachusetts stated, "[w]e may be looking at some sort
of perverse incentive under CRA for banks to purchase [predatory] loans in
minority communities to fulfill CRA obligations. ,,65 Further, note that purchasing banks can acquire tl,e loans with impunity by using the holder in due course
doctrine66 to insulate themselves from defenses such as fraud in the inducement,
lack of consideration, or unconscionability.67
B. Truth in Lending Act
The Truth in Lending Act ("TILA")68 "embodies a Congressional effort to
guarantee the accurate and meaningful disclosure of the costs of consumer
credit and thereby to enable consumers to make informed choices in the credit
marketplace. ,,69 While originally enacted in 1968, tl,e purposes of the Act have
not changed substantially and today reflect a tripartite focus: to stabilize the
economy by increasing the informed use of credit, to enable consumers to shop
for the most favorable credit terms, and to protect consumers against inaccurate
and unfair billing.70 TILA seeks to accomplish its goal by entitling the homeowner to a trutll in lending disclosure statement and by providing consumers at
least three days to rescind credit transactions in which their homes are used as
collateral7 ! The latter provision is designed to provide a cooling-off period
during which the consumer may reconsider the transaction or "shop" around to
make sure the rates are comparable to other lenders in the marketplace.
A TILA rescission can provide the consumer with a powerful tool. "Once the
notice of rescission is given, the lien on the consumer's home becomes void."n
Moreover, the homeowner is entitled' to a return of all finance, interest, and
73
other charges, such as closing costs and brokerage fees. If the lender violates
the consumer rights enumerated under TILA, the consumer may be eligible to
enjoin foreclosure, collect actual damages, collect statutory damages (between
$100 and $1,000) or recover attorneys' fees. 74 In addition, the consumer's right
65. Steve Marantz, U.S. Panel to Hold Hearing on St;con.d Mortgage-Bank Ties, BOSTON GLOBE,
May 8,1991, Nat'l Section, at 19.
66. A holder in due course is one who takes the debt instrument for value in good fait1l and without
notice of a potential defense or claim to it. U.C.C. § 3-302. A person or entity in that position, under
most circumstances, is fTee from defenses by a party with whom the new owner has not dealt. [d.
§ 3-305.
67. Forrester, Mortgaging the American Dream, supra note 5, at 422-~3.
68. 15 U.S.CA § 1601 (West 1998).
69. ERNEST L. SARASON, JR., NAT'L CONSUMER LAW CrR., TRUTH IN LENDING 17 (1986).
70. See 15 U.S.C.A. § 1601(a) (West 1998).
71. KATHLEEN E. KEEST & ERNEST L. SARASON, JR., TRUTH IN LENDING § 6.1 (2d ed. 1989).
72. !d.
73. !d.
74. See 15 U.S.C.A. § 1640 (West 1998)..
of rescission may be extended by as many as three years. 75 Fnrtber, Congress
recently amended TILA to prohibit certain unfair terms in home improvement
and home equity loans with high interest rates?6 The loans affected are those
with annual percentage rates more than ten percentage points greater than the
rates on Treasury securities of comparable maturity or with points and fees
exceeding the greater of eight percent of the loan amount or $400. 77
Unfortunately, TILA has been of limited use to victims of predatory lending
practices. 78 Although studies indicate that disclosure by lenders has improved
since the enactment of TILA, low-income consumers are having difficulty
taking advantage of TILA's protections. 79 Many reverse redlining victims face
problems of poor education,80 settings for consumer bargaining which are not
conducive to proper analysis, and lack of opportunity to read the disclosures
before becoming psychologically committed to the contract. 8' It is naive to
believe that mere disclosure will sufficiently rectify the problem of reverse
redlining given that "almost half of all Americans over age sixteen lack basic
reading and math skills. ,,82 This is especially true in the case of language
minorities for whom English proficiency rates are often lower. 83
There is also a behavioral disparity in "shopping around" for better terms
between low-income and high-income consumers. 84 Even when the terms of the
loan are fully understood, targets of predatory lenders generally have few
borrowing options, which allows lenders to meet TILA requirements while
75. Id. § 1635(1).
76. Home Ownership and Equity Protection Act of 1994, Pub. L. No. 103-325, § 152(d), 108 Stat.
2160, 2192 (codified at 15 u.S.C. §§ 1601-1648 (1994)). Forrester, Constructing a New T71eoretical
Framework, supra note 26, at 1112.
77. 15 U.S.C. § 1602(aa) (1994).
78. See generally Edward L. Rubin, Legislative Methodology: Some Lessons from the Truth-inLending Act, 80 GEO. L.J. 233 (1991) (using the TlLA as a springboard for analysis, discussing why
regulatory legislation is often ineffective). In assessing TILA's benefits for consumers, the author posits:
Nor were consumers well served by this errant legislation. Its disclosure provisions were not
telling them what they needed to know, whether one identifies their needs as their expressed
desires, the prerequisites for economically rational behavior, or the detenninations of their
elected representatives.
!d. at 238.
79. See William K. Brandt & George S. Day, Infol7nation Disclosure and Consumer Behavior: An
Empirical Evaluation ofTruth-in-Lending, 7 U. MICH. J.L. REFORM 297,302-03 (1974).
80. A 1993 study revealed that forty to forty-four million of America's 191 million adults scored at
the lowest levels of proficiency in interpreting prose and documentary information. See Steven W.
Bender, Consumer Protection for Latinos, Overcoming Language Fraud and English-Only in the
Marketplace, 45 AM. U. L. REv. 1027 [hereinafter Bender, Consumer Protection for Latinos] (citing
IRWIN S. KIRSCH BT AL., NATIONAL CTR. FOR Bouc. STATISTICS, ADULT LITERACY IN AMERICA (1993».
81. Id. at 1073-74.
82. Eric J. Gouvin, Truth in Savings and the Failure of Legislative Methodology, 62 U. CIN. L. REv.
1281, 1300 (1994) (citing IRWIN S. KIRsCH ET AL., NATIONAL CENTER FOR Enuc. STATISTICS, ADULT
LITERACY IN AMERICA xii-xv (1993».
83. Bender, Conswner Protection for Latinos, supra note 80, at 1033 (citing NATIONAL COUNSEL OF
LA~, THE EDUCATION OF HISPANICS: STATUS ANn lMPUCATIONS 12 (1986».
84. See discussion supra Part II.
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preying on the fact that the borrower will have little choice but to accept the
loan as presented. Therefore, only high-income consumers, who have the
wherewithal to gather numerous bids and compare information, are likely to
benefit from TILA.
C. Doctrine of Unconscionability
Based on the doctrine of freedom of contract, courts will generally hold
parties to a contract accountable to its terms. 85 However, when the terms are
particularly egregious, enforcement may be denied based on the doctrine of
unconscionability.86 The goal of this doctrine is to prevent "shockingly unfair"
conttacts.87 This principle is expressed in section 2-302 of the Uniform Commercial Code, providing:
If the court as a matter of law finds the contract to have been unconscionable
at the time it was made, the court may refuse to enforce the contract, or it may
enforce the remainder of the contract without the unconscionable clause, or it
may so limit the applications of any unconscionable clause as to avoid any
unconscionable result. 88
Aside from the U.C.c., the doctrine of unconscionability is firmly rooted in the
common law and has been incorporated into the Second Restatement of Contracts. According to the Restatement, indicators of unconscionability include:
belief by the stronger party that there is no reasonable probability that the
weaker party will fully perform the contract; knowledge of the stronger party
that the weaker party will be unable to receive substantial benefits from the
contract; knowledge of the stronger party that the weaker party is unable
reasonably to protect his interests by reason of physical or mental infirmities,
ignorance, illiteracy or inability to understand the language of the agreement .... 89
The doctrine of unconscionability can be divided into two categories: procedural and substantive. Procedural unconscionability addresses the bargaining
process-unequal bargaining power, or misleading consumers as to contracts'
85. W. David Slawson, BINDING PROMISES: THE LATE 20TH CENTURyi'REFORMATION OF CONTRACT
LAW 3 (1996).
86. See James Gordley, Equality in Exchange, 69 CAL. L. REv. 1587 (1981).
87. 17A AM. JUR 2n Contracts § 295 n.60 (1991) (defining an unconscionable bargain as one
wherein the inequality is so strong and manifest as to shock the conscience of any person of common
sense).
88. U.e.e. § 2-302 (1972).
89. RESTATEMENT (SECOND) OF CONTRACTS § 208 emt. d (1979).
egregious tenns?O A contract is deemed substantively unconscionable if its
tenns are lopsided, without regard to the process by which those tenns were
reached. 91 Most successful claims have involved a combination of procedural
and substantive unconscionability; however, commentators have questioned
whether both are required. 92
Arguably, courts have been most apt to utilize the doctrine of unconscionability to protect unsophisticated individuals who find themselves in economic
distress due to unfair credit tenns. In Jones v. Star Credit Corp., the plaintiffs
purchased a home freezer for $900 even though the fair market value was only
$300. 93 Based on the excessive price, the court held the contract to be unconscionable. 94 The court stated that a significant factor in the decision was the
"limited financial resources of the purchaser, [which were] known to the
defendant at the time of sale.,,95 In Williams v. Walker-Thomas Furniture Co.,
the plaintiff, pursuant to an installment contract, purchased a variety of items on
credit totaling $1,800.0 6 The agreement contained a cross-collateral provision
whereby each payment was credited pro-rata against all of the purchases?7
Consequently, the seller repossessed all items purchased npon default of payment even thongh the consumer had already paid $1,400.0 8 The court remanded
the case holding that the "absence of meaningful choice" on the part of the
consumer was an indication that the clause was unconscionable?9
Strictly speaking, section 2-302 of the Unifonn Commercial Code would only
be applicable to contracts for the sale of goods. 100 However, as alluded to
earlier, courts have held that the doctrine of nnconscionability may be applied
freely to all contracts including those ending in foreclosure due to egregions
interest rates. 10 1 Challenges to interest rates have been made for decades in the
eqnitable context of judicial foreclosure proceedings. 102 Conseqnently, a claim
90. See Wheeler v. 81. Joseph Hospital, 63 Cal. App. 3d. 345, 356 (1977) (setting aside a mandatoIY
hospital arbitration provision for being a "take it or leave it" contract of adhesion).
91. Harry G. Prince, Unconscionability in California: A Need for Restraint and Consistency, 46
HASTINGS LJ. 459, 473 (1995).
92. See id. at 472.
93. 298 N.Y.S.2d 264,266 (Sup. Ct. 1969).
94. Id.
95. Id.
96. 350 F.2d 445 (D.C. Cir. 1965) (holding that where the element of unconscionability is present
when contract is entered into, the contract is unenforceable).
97. Williams, 350 F.2d at 447.
98. Id. at 447-48.
99. Id. at 449-50.
2~l06(1)
(1972) (" 'contract' and 'agreement' are limited to those relating to the
present or future sale of goods").
101. See Steven W. Bender, Rate Regulation at the Crossroads of Usury and Unconscionability: The
100. V.C.C. §
Case for Regulating Abusive Commercial and Consumer Interest Rates Under the Unconscionability
Standard, 31 HODS. L. REv. 721, 734-35 (1994) [hereinafter Bender, Rate Regulation] (discussing how
section 2-302's unconscionability standard has been applied freely by analogy to bargains outside its
scope).
102. Id. at 737 (citing John D. Calamari & Joseph M. Perillo, CONTRACTS § 9-39, at 403-04 (3d ed.
1987)); see also White River Conservancy Dist. v. Commonwealth Eng'rs, Inc., 575 N.E.2d 1011, 1017
by a victim of reverse redlining under the doctrine of unconscionability may be
a viable option.
If a provision of a contract is found to be nnconscionable, the conrt has a
variety of remedies available. First, the conrt may eliminate the clause that is
grossly unfair, bnt leave the remainder of the contract enforceable by the
plaintiff. Second, the court may refonn the contract by modifying the unconscionable tenns so that they are reasonable. 103 For example, courts have exercised
the power to remake bargains by reducing the interest rate on a loan. 104 Finally,
a stricter court may refnse to enforce the entire contract, thereby fnlly denying
· iff any recovery. 105
the p1amt
Althongh the conception of unconscionability was premised on notions of
justice and equity, its incorporation into section 2-302 of the Unifonn Commercial Code has generated significant controversy for its ambiguity.106 This controversy significantly limits the doctrine's effectivenes8 as a canse of action for
victims of predatory lenders. Detractors of the unconscionability doctrine fear
that the power to strike unfair contracts wonld give excessive discretion to
courts, allowing them to interfere with contracts based on a jndge's subjective,
indetenninate view of unfairness and leading to inconsistent decisions. 107 In
fact, two cases tried in the same California courthouse, examining the same
contract nnder virtually the same circum8tances, had exactly opposite resnltsone strnck down the tenns, while the other found nO unconscionability.108 In
addition, because the case-by-case analysis of the nnconscionability doctrine
does not afford lenders clear, objective standards as to which loans are valid, a
claim may not provide snfficient deterrence.
.
For a number of reasons, a victim of reverse redlining will also have difficulty
actually winning a claim of price unconscionability. First, when the buyer
knowingly cho08es to enter into a contract in which the tenns have been clearly
disclosed by the stronger party, it will be very difficult to show unfair snrprise. 109 Further, absent duress, fraud, or a monopoly situation, and given that
(Ind. Ct. App. 1991) (holding that a contract between the government and an engineering firm
providing for 18% prejudgment interest rate, while generally permissible, was unenforceable in this
case, because of the lengthy delays in the litigation and appeals, and the fact that payment would come
fTom the taxpayers-the court awarded ten percent prejudgment interest instead).
103. See Frostifresh Corp. v. Reynoso, 274 N.Y.S.2d 757 (N.Y. Dist. Ct. 1966), rev'd in part, 281
N.Y.S.2d 964 (N.Y. App. Term. 1967) (holding that the seller may only recover reasonable profit and
not unconscionable price in suit to enforce contract).
104. JOHN D. CALAMARI & JOSEPH M. PERILLO, CONTRACfS § 9-39, a'405 (3d. ed. 1987).
105. [d.
106. Prince, supra note 91, at 461-62.
107. See Arthur Allen Leff, Unconscionability and the Code-The Emperor's New Clause, 115 U.
PA. L. REv. 485, 488 (1967) (stating that the historical development of section 2-302 is unclear and the
application ineffective).
108. Prince, supra note 91, at 461 (citing Batfilm Productions, Inc. v. Warner Bros., Inc., 16 No.4
En!. L. Rep. 3 (Cal. Super. Ct. 1994)).
109. While unfair surprise is not a prerequisite for unconscionability, in virtually every case where a
court has found unconscionability solely based on price,the purchasers were unaware of its exorbitant
nature. Prince, supra note 91, at 489 (citing 'Frank P. Darr, Unconscionability and Price Faimess, 30
the claimant has the ability to walk away from the transaction upon disclosure
of its tenns, it will be difficult for a court to find that no other meaningful choice
existed, 110 an element which was critical to the holding in Williams. 111 Courts
are also typically unwilling to inquire into the adequacy of consideration1l2
because the value of bargains may be impossible to police,l]3 and courts often
contend that allowing parties to assign their own valne to bargains is a necessity
l14
of the f;ee market system.
Finally, the case-by-case method necessary for
unconscIOnability claims IS very expensive to both the plaintiffs and the backlogged court system. 115
Another drawback of the doctrine of unconscionability is that the remedial
value in predatory lending cases is very limited. 1l6 Courts generally have taken
the position that unconscionability cannot be used as a basis for affinnative
recovery. 117 Instead, unconscionability may be used only in a defensive posture,
allowmg the party who purchases on credit to refuse to pay and then nse the
unconscionability doctrine to fend off a claim by the seller for breach of
contract118 ~onsequently, a significant recovery by a victim of predatory
lendmg IS unlikely and deterrence is limited.
D. Civil Rights Act of 1866: Sections 1981 and 1982
Many 119
cases are brought under sections 1981 and 1982 of the Civil Rights Act
of 1866. The Act is premised on the Thirteenth Amendment, which has as its
Hous. L REv. 1819, 1~43-45 (1994) (surveying 44 price unconscionability cases and finding that only
2 of 19 successful claims reflect findings of unconscionability without additional procedural unfairness».
110.
Ill.
112.
113.
114.
Frank P. Darr, Unconscionability and Price Fairness, 30 Hous. L. REv. 1819, 1832 (1994)
350 F.2d at 449-50.
.
Darr, supra note lID, at 1825.
See ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 127, at 541-42 (1963).
To the extent that competition exists, the high priced seller cannot sustain itself because other
sellers ~ill t~e advantage of the opportunity to grab its market share. Posner argues that "[i]f
unconscIonabIlity ~eans tha~ a court ma~ nUl~. a contract if it considers the consideration inadequate
or the t~nns otherwIse one-Sided, the baSIC pnncIple of encouraging market rather than surrogate legal
transactIOns where (market) transaction costs are low is badly compromised." RICHARD A. PosNER.,
ECONOMIC ANALYSIS OF LAW § 4.7 at 104 (3d ed. 1986).
115. See generally Arthur A. Leff, Unconscionability and the Crowd-Consumers and the Common
Law Tradition, 31 U. Pm. L. REv. 349, 354-57 (1970) (noting tlle inefficiency of tlle case-by-case
method).
116. Bender, Rate Regulation, supra note 101, at 758.
117. Prince, supra note 91, at 472.
118. See Bennet v. Behring Corp., 466 F. Supp. 689, 699 (S.D. Fla. 1979) (holding that money
damages may not be recovered for unconscionability). See also Cowin Equip. Co., Inc. v. General
Motors ~orp., 734 F.2d 1581, 1581-82 (11tll Cir. 1984) (holding that damages are not available for an
unconscIOnable contract).
119. 42 U.S.c. §§ 1981, 1982 (1994 & Supp. II 1996).
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purpose the elimination of all vestiges of the slavery system. 120 Under section
1981, "AJI persons within the jnrisdiction of the United States shall have the
SaIne right in every State and Territory to make and enforce contracts, to sue, be
parties, give evidence, and to the fuJI and equal benefit of all laws and
proceedings for the security of persons and property as is enjoyed by white
citizens .... ,,121 Section 1982 states that "[a]ll citizens of the United States
shall have the SaIne right, in every State and Territory, as is enjoyed by white
citizens thereof to inherit, pnrchase, lease, sell, hold, and convey real and
person al propert y. " 122
.
While section 1982 provides a viable cause of action for victims of discriminatory lending practices, it was not significantly utilized for over one hundred
years after its passage.'23 It was only over the last thirty years that the Supreme
Court, "by deciding that the statute applied to private acts of discrimination,
greatly enhanced the status of the statute and considerably broadened the scope
of its usefulness." 124 Courts have found that mortgage redlining practices are
covered under section 1982,125 and commentators have suggested that the
practice of reverse redlining may also be actionable, "if· the creditor uses a
prohibited basis to treat individuals 'less favorably.' ,,126 This would include
seeking out poor minorities for bad credit tenns. 127
Courts have allowed successful claimants equitable relief,128 such as injunctions and, under certain circumstances, compensatory and punitive damages,
even though there are no express provisions for enforcement in the 1866 ACt. 129
Further, claimants can recover attorneys' fees 130 and reimbursement for costs
incurred during their cases 131 if they prevail. 132 These provisions are intended to
facilitate the enforcement of civil rights statutes by encouraging private individu120. See WARREN L. DENNIS & J. STANLEY POTTINGER, FEDERAL REGULATION OF BANKING REDLINING
4- I to 4-2 (1980).
121. 42 U.S.C. § 1981(a) (1994 & Supp. II 1996).
122. 42 U.S.C. § 1982 (1994 & Supp. II 1996).
123. Sullivan v. Little Hunting Park, Inc., 396 U.S. 229, 241 (1969) (Harlan, J., dissenting)
(describing section 1982 as a "little-used section of a 100-year-old statute" due to its dOl'mancy until
the 1960s).
124. HOWARD ZUCKERMAN ET AL., FAIR HOUSING LmGATION HANDBOOK 7 (1993) (citing Jones v.
Alfred H. Mayer Co., 392 U.S. 409, 413 (1968) (applying section 1982 to private racially restrictive
covenants); see also Runyon v. McCrary, 427 U.S. 160, 170 (1976)).
125. See Evans v. First Fed. Say. Bank, 669 F. Supp. 915, 919 (N.D. Ind. 1987); Mackey v.
Nationwide Ins. Cos., 724 F.2d 419, 421 (4th Cir. 1984).
126. JONATHAN SHELDON, NATIONAL CONSUMER LAW em, CREDIT DISCRIMINATION § 4.2.10.3 at
85-86 (1993 & Supp. 1995).
127. !d.
128. See Jones v. Alfred H. Mayer Co., 392 U.S. 409, 414 n.I3 (1968) ("The fac1 that 42 U.S.c.
§ 1982 is couched in declaratory tenns and provides no explicit method of enforcement does not ...
prevent a federal court fTOm fashioning an effective equitable remedy.").
129. See Johnson v. Ry. Express Agency, 421 U.S. 454, 460 (1975).
130. ZUCKERMAN ET AL., supra note 124, at 288.
13 I. !d. at 292.
132. See Hensley v. Eckerhati, 461 U.S. 424, 440 (1983).
-
als who have been injured by discriminatory housing practices to vindicate their
own rights. 133
Unfortunately, certain aspects of sections 1981 and 1982 limit their impact in
the fight against reverse redlining. First, because only citizens may sue under
section 1982,!34 non-citizens, many of whom are language minorities,!35 are
precluded from bringing suits regardless of how egregiously a predatory lender
has taken advantage of them. Sadly, tlns lack of protection has made "language
minorities the victims for unscrupulous lenders who prey on their inability to
understand the tenus of the bargain." 136 For example, Hispanic immigrants in
California, unable to read English, unknowingly sign documents tlmt convey
full title to their homes to loan brokers.!37 Further, the lender may deter victim
action by using anti-immigrant laws to manipulate a borrower's fear of the
government. For instance, the lender may threaten investigation into victims'
immigration status if they complain to any government agency or appear in
court to contest the foreclosure. !38
Additionally, the Supreme Court has limited the scope of sections 1981 and
1982 to discrimination based on "ancestry or ethnic characteristics"-the
statutes do not directly extend to national origin discrimination. l39 Pursuant to
the holdings of the Supreme Court, lower courts have dismissed claims asserted
by a Norwegian!40 and a Colombian.!4! Wlnle there will be cases where
national origin overlaps with race (and hence be actionable), it is likely that
there will be plaintiffs who are denied relief under sections 1981 and 1982
because mere birthplace discrimination is insufficient to state a claim. !42
It can also be onerous for an organizational plaintiff to bring an action under
section 1981 or section 1982, which have been construed as limiting standing to
"the direct victims of the alleged discriminatory practice."!43 Organizational
133.
134.
135.
136.
ZUCKERMAN ET AL., supra note 124, at 288.
[d. at 8.
As used here, a language minority is a person not proficient in the English language.
Bender, Consumer Protection/or Latinos, supra note 80, at 1030.
137. See Tracy WJ.1k:inson, Elderly, Poor Are Easy Prey for Home-Equity Schemers, L.A. TIMEs, Oct.
15,1989,atB1.
138. Bender, Consumer Protection for Latinos, supra note 80, at 1035 (citing to Memorandum from
Raul Ramirez, Hispanic Outreach Program Director, Oregon's Attorney General's Office, to Timothy
Wood, Financial Fraud Division, Oregon Attorney General's Office (May 24, 1995».
139. 81. Francis College v. AI-Khazraji, 481 U.S. 604, 613 (1987) (stating that section 1981 claims
do not necessarily extend to nationalities). But see Shaare Tefila Congregation v. Cobb, 481 U.S. 615,
618 (1987) (finding that Arabs and Jews may have standing to make section 1982 claims because at the
time the statute was enacted, they were not considered to be part of the Caucasian race).
140. See Bauge v. Jernigan, 671 E Supp. 709, 712 (D. Colo. 1987) (holding that allegation that
plaintiff was discriminated against because he was Norwegian did not state a section 1983 claim based
on racial animus).
141. See Ana Leon T. v. Federal Reserve Bank, 823 E2d 928, 931 (6th Cir. 1987) (holding
discrimination based on Colombian heritage does not state a claim under section 1981).
142. See St. Francis College, 481 U.S. at 614 (Brennan, J., concurring).
143. Fair Employment Council of Greater Wash., Inc. v. BMC Marketing Corp., 28 F.3d 1268, 1279
(D.C. Cir. 1994) (holding that a fair employment organization lacked standing to bring a claim under
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plaintiffs generally claim standing by arguing that (I) they have been injured in
their own right as a result of defendant's actions (derivative standing)!44 or (2)
their members have been directly injured as a result of defendant's actions
. al standmg
' ) .!45
(representation
While Article III injury-in-fact is usually quite easy to demonstrate---<liverted
resources or frustration of purpose suffice '46-prudential standing for both
derivative and representational claims can be difficult to show. With regard to
derivative claims, courts, for prndential reasons, are reluctant to find that
sections 1981 or 1982 protect against injuries such as frustration of purpose.!47
With regard to representational claims, courts are unlikely to find prudential
standing absent a showing that (I) the organizational plaintiff's members (the
individual victims of the discrimination) are unable to bring suit on their own,
and (2) the members' injuries are sufiiciently germane to the purpose of the
.
.
148
organIzation.
Finally, sections 1981 and 1982 can not be used to combat all types of
racially discriminatory practices. For example, marketing devices that strategically target minorities are a common tool of lenders engaging in reverse
section 1981, even though its mission of promoting equal opportunity employment had been frustrated
by defendant employment agency's discriminatory job refenals).
144. Warth v. Seldin, 422 U.S. 490, 511 (1975) ("There is no question that an association may have
standing in its own right to seek judicial relief from injury to itself and to vindicate whatever rights and
immunities the association itself may enjoy. Moreover, in attempting to secure relief from injury to
itself the association may assert the rights of its members, at least so long as the challenged infractions
adversely affect its members' associatiCinal ties. ").
145. !d. ("Even in the absence of injury to itself, an association may have standing solely as the
representative of its members. ").
146. In the Seventh Circuit, the "only injury which need be shown to confer standing on a
fair-housing agency is deflection of the agency's time and money from counseling to legal efforts
directed against discrimination." Village of Bellwood v. Dwivedi, 895 F.2d 1521, '1526 (7tirCir. 1990).
The D.C Circuit has rejected tIlis reasoning, arguing instead that diversion of resources is "selfinflicted ... [and] results not from any actions of [the defendant], but rather from the [organization's]
own budgetary choices." Fair Employment Council of Greater Wash., Inc. v. BMC Marketing Corp., 28
F.3d 1268, 1276 (D.C. Cir. 1994). Instead, the D.C. Circuit argued that a defendant's discriminatory
practices might frustrate an organization's anti-discrimination mission, and that such impairment could
give rise to Article ill "injury-in-fact." [d. at 1277.
147. In Fair Employment Council, the D.C. Circuit argued that defendant's (purported) discrimination did not interfere with the organizational plaintiff's right to make contracts. Additionally, it would
not, for prudential reasons, construe section 1981 to protect against frustration of purpose. See 28 F.3d
at 1277, 1279. Cf Huertas v. East River Housing Corp., 81 ER.D. 641, 647 (S.D.N.Y. 1979) (finding
that conununity organizational plaintiffs had representational standing, and hence, refusing to reach the
more difficult question of whether the organizations' specific injuries established prudential standing
under section sections 1981 and 1982).
148. See Fair Employment Council, 28 F.3d at 1280 (citing Canfield Aviation v. National Transp.
Safety Bd., 854 E2d 745, 748 (5th Cir. 1988); Flittie v. Solem, 827 E2d 276, 280 (8th Cir. 1987));
Warth, 422 U.S. at 511-12. The D.C. Circuit has been, reluctant to find that individual discriminatees are
incapable of bringing suit. arguing that tile organization seeking standing could simply devote its
resources to assisting members in bringing their own claims. Fair Employment Council, 28 E3d at
1280. But cf Amato v. Wilentz, 952 F.2d 742, 749 (3d Cir. 1991) (questioning, in First Amendment
context, whetiler it is appropriate to snictIy limit standing of plaintiffs who raise claims of third parties,
and whether a more flexible balancing test should be employed).
redlining.!49 Such practices include using solely minority models or concentrating advertising efforts in low-income, heavily minority communities.!SO This
type of targeted adve!1ising is not actionable under sections 1981 and 1982. 15 !
Therefore, although these practices may be discriminatory, no legal recourse is
afforded to the victims under the Civil Rights Act of 1866.
IV. FAIR HOUSING ACT:
THE MOST VIABLE VEffiCLE FOR CHANGE
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either a "pattern or practice" of denying Title VIII rights or an "issue of general
public importance." !60 Finally, the complainant can bring a private suit against
the offender. !6!
To sustain an action under the FHA, the plaintiff must prove four elements.!62
First, the plaintiff's discrimination must be attributable to one of the protected
categories: race, COlOT, religion, sex, national origin, familial status, or disability. ]63 Second, the discrimination must occur in the context of the sale or rental
of a dwelling.!64 Third, the specific type of transaction at issue must be
covered. !6S Finally, the plaintiff must meet the required standard of proof.!66
A. General Overview
Title VIII of the Civil Rights Act of 1968,!S2 also known as the Fair Housing
Act ("FHA"), was enacted in response to a study that found widespread
residential segregation in America.!S3 The FHA's aim was to provide protection
to those persons who had suffered housing discrimination on the basis of race,
color, religion, or national origin.!54 In 1988, the FHA was amended to provide
stronger enforcement provisions and expanded coverage.!SS The changes significantly enhanced the legal options for victims of housing-related discriminatory
practices. Despite these improvements, the FHA's potential is still greatly
unrealized. !S6
There are tlrree avenues of action under tl,e FHA. First, a victim can file a
complaint Witll the U.S. Department of Housing and Urban Development
("HUD").!S7 If, after a thorough investigation, the complaint is found to be
valid, HUD will attempt to resolve the problem "tlrrough informal methods of
conference, conciliation, and persuasion.,,!58 Second, the Attorney General can
choose to independently bring a suit in response to the discriminatory housing
practice at issue. 159 Cases brought by the Attorney General can be based on
149. ZUCKERMAN ET AL., supra note 124, at 156.
150. [d.
151. See Spann v. Colonial Village, Inc., 899 F.2d 24, 35 (D.C. Cir. 1990) (holding that sections
1981 and 1982 are not "all-purpose antidiscrimination or comprehensive open housing laws," and that
section 1982 "does not prohibit [real estate] advertising or other [dwelling place sale or rental]
representations that indicate discriminatory preferences").
152. 42 U.S.C. §§ 3601-3619, 3631 (1994 & Supp. II 1996).
153. See Robert G. Schwemm, Introduction to Mortgage Lending Discrimination Law, 28 J.
MARSHALL L. REv. 317 (1995) [hereinafter Schwemm, Mongage Lending Discrimination Law] (stating
that, in response to urban riots, the Kerner Commission Report studied the housing disparity between
races in the United States).
154. ROBERT G. SCHWEMM, HOUSING DISCRIMINATION LAW 1 (1983).
155. See Fair Housing Amendments Act of 1988, Pub. L. No. 100-430, § 6, .102 Stat. 1619, 1620
(codified as amended at 42 U.S.c. § 3604 (1993)).
156. Schwemm, Mortgage Lending Discrimination Law, supra note 153, at 332.
157. Jane McGrew et al., Washington Lawyers' Committee for Civil Rights Under the Law: Fair
Housing, 27 How. L.J. 1291, 1319 (1984).
158. [d.
159. [d.
B. Broad Construction of the FHA
In Trafficante v. Metropolitan Life Insurance .co., the Supreme Court held
that claims brought under the FHA will be broadly construed.! 67 A later decision
by the U.S. Court of Appeals for the Sixth Circuit expanded on the holding in
Trafficante by reasoning that the legislative intent of the FHA was to "eliminate
all traces of discrimination within the housing field.,,!68 Under the FHA, one
may not "engag[e] in residential or real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms
or conditions of such a transaction, because of race, color, ... or national
origin."!69 The phrase "terms or conditions" includes mortgages and foreclosure terms.!70 Consequently, reverse redlining cases involving institutions charging egregious interest rates to minorities should fall within the scope of the
FHA.
160. ZUCKERMAN ET AL., supra note 124, at 203 (quoting 42 U.S.c. § 3614(a) (1994)).
161. The plaintiff must commence the action within two years of the last occurrence of the
"discriminatory housing practice." [d. Prior to the 1988 amendments, the statute of limitations afforded
to the plaintiff was merely 180 days. ld. See infra Part IV.C.iv (describing the continuing violations
doctrine's applicability to the statute of limitations).
162. Schwemm, MOJ1gage Lending DiscriminationLaw, supra note 153, at 325.
163. [d.
164. [d. See also 42 U.S.c. § 3602(b) (defining "dwelling").
165. Schwemm, Mortgage Lending Discrimination Law, supra note 153, at 325-26. The language of
the FHA explicitly covers financial discrimination. leI. at 326.
166. Id. at 326. See infra Part N.C.ii (discussing the required standard of proof under the FHA).
167. 409 U.S. 205, 208 (1972) (stating that the language of the FHA is broad and inclusive).
168. Marr v. Rife, 503 F.2d 735,740 (6th Cir. 1974).
169. 42 U.S.c. § 3605(a) (1994)) (emphasis added).
170. See, e.g., Harper v. Union Sav. Ass'n, 429 F. Supp. 1254, 1257 (N.D. Ohio 1977) ("This court
concludes that it is the intent of Congress that section 3605's prohibitions against discrimination on the
part of lending institutions in connection with real estate loans proscribe discrimination in the manner
in which a lending institution forecloses a delinquent or defaulted mortgage note since the right of
foreclosure is one of the 'teans or conditions of such loan.' "); 42 U.S.C. § 3605(b)(1) (1994) (defining
"residential real estatehrelated transactions" as "the making ... of loans or providing other financial
assistance-for purchasing, constructing, improving, repairing, or maintaining a dwelling; or [making
or purchasing of loans] secured by residential real estate")..
C. Distinctive Competencies ofthe FHA in Reverse Redlining Cases
The FHA may provide a victim of reverse redlining with legal tools not
afforded under other laws. 171 This section explores some of the FHA's distinguishing characteristics, including its broader standing requirement, lower standard
of proof, strong remedial potential, and continuing violations doctrine.
1. Standing
Congress intended that standing under the FHA extend to the full reach
pennitted by the Constitution. 172 As such, organizational plaintiffs established
to combat housing discrimination have standing to sue if they can prove
injury-in-fact. 173 Injury-in-fact is established where a defendant's discriminatory practice "frustrates" the organization's ability to meet its goals of eradicating housing discrimination,174 or forces the organization to divert resources that
would otherwise be used for normal operating expenses. '75 This broad standing
makes FHA a vital weapon against predatory lenders-organizations have more
resources to litigate, and are more likely to secure effective relief, than individual discriminatees.
In addition to affording organizations standing to sue, FHA's broad standing
extends to "testers" who examine discrimination in the sale and rental of
dwellings. '76 While testers do not intend to buy or rent a home (and hence are
not really "injured" by the discrimination), FHA provides them with a substan-
171. See discussion supra Part III (discussing limitations of other legal alternatives with respect to·
reverse redlining cases).
172. Havens Realty Corp. v. Coleman, 455 U.S. 363, 372 (1982) (concluding that the organization
Housing Organizations Made Easy could have standing based on its mission). See also Fair Employ~
ment Council, 28 F.3d at 1278.
173. See Havens, 455 U.S. at 379. See also City of Chicago v. Matchmaker Real Estate Sales Ctr.,
Inc., 982 F.2d 1086 (7th Cir. 1993) (holding that organization had standing since it had to divert
resources from providing counseling to fighting legal battles against discrimination); Hooker v.
Weathers, 990 F.2d 913, 915 (6th Cir. 1993) (granting standing to Fair Housing Contact Service due to
its devotion of resources to investigating and confinuing discriminatory conduct by defendants). Some
of the goals of these organizations include educating the public regarding fair housing laws, counseling
individuals who may have been victims of unlawful discrimination, receiving and investigating
complaints regarding housing discrimination, and referring cases to appropriate enforcement agencies.
See Teresa Coleman Hunter & Gary L. Fisher, Housing: Fair Housing Testing-UncoveJing Discriminatory Practices, 28 CREIGlITONL. REv. 1127, 1131 (1995).
174. Havens, 455 U.S. at 379.
175. [d. at 378. The D.C Circuit, however, accepts only' the frustration of purpose theory of
injury-in-fact. Fair Employment Council, 28 F.3d at 1268.
176. "Testing" is a method used to prove the existence of housing discrimination whereby black and
white individuals having the same financial backgrounds pose as potential buyers or renters of
dwellings. If an offer to sell or rent the dwelling is extended to the white tester but not to the black
tester, this may be evidence of redlining. JOHN P. RELMAN, HOUSING DISCRIMINATION PRACTICE MANUAL
2-37 (1996). See also Havens, 455 U.S. at 373 (defining testers as "individuals who, without an intent
to rent or purchase a home or apartment, pose as renters or purchasers for the purpose of collecting
evidence of unlawful steering practices").
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tive right '77 to be free from misrepresentation, and a right to enforcement "by
civil actions in appropriate United States district COurtS.",78 As such, if a real
estate agent, for reasons related to the tester's race, misrepresents a home's
availability, the tester may sue because her right to receive the same information
as whites has been violated. An argument can be made that this reasoning
extends to testers in the reverse redlining context. The detenninative issue
would be whether testers offered higher interest rates and less favorable terms
"in the provision of services ... in connection [with sale or rental]" have
suffered injury-in-fact. '79 First, the plaintiff would have to argue that statutory
protections against "discrimination" (as opposed to "misrepresentation") provide a substantive right, and hence injury-in-fact, to tester "discriminatees"
who have no intention of securing financing..'80 Second, the plaintiff would have
to show that the unfavorable terms were "because of" race. This argument is
not as onerous as it may seem, given the broad scope of the FHA. Even if the
less favorable terms could arguably be explained by "neutral" factors (i.e.,
racism not the determinative factor), so long as race "was a consideration and
played some role in a real estate transaction," there is discrimination "because
of race." 18I Finally, even though the testers do not incur economic damages as a
177. 42 U.S.C § 3605(d) (1994) (prohibiting the representation "to any person because of race,
color, religion, sex, handicap, familial status, or national origin that any dwelling is not available for
inspection, sale, or rental when such dwelling is in fact so available").
178. 42 U.S.c. § 3612(a). See also Havens, 455 U.S. at 374.
179. 42 U.S.C. § 3604(b) (making it unlawful to "discriminate against any person in the terms,
conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in
connection therewith, because of race"). Moreover, section 3605(a) prohibits a business that engages in
"residential real estate-related transactions" fTom discriminating on the basis ofrace. Section 3605(b)(1)
defines "residential real estate-related transactions" to include "the making ... of loans or providing
other financial assistance-for purchasing, constructing, improving, repairing, or maintaining a dwelling; or secured by residential real estate."
180. The Supreme Court has indicated that the provisions in 42 U.S.c. § 3604 afford persons
specific rights for which they may "not to be discriminated against." Gladstone v. Village of Bellwood,
441 U.S. 91, 123-24 (1979). It could be argued, however, that a tester who has no intention of securing
a loan, and who is probably precluded from securing the loan at issue (for instance, the tester is using
false qualifications), has not really suffered injury-in-fact. As to tIus point, the Seventh Circuit has
found that § 3604(b) provides a substantive right to a tester, and any invasion thereof constitutes
injury-in-fact, analogous to § 3604(d). In Judge Manion's words:
Unlike § 3604(a), § 3604(d) does not require a bona fide offer; instead, § 3604(d) creates an
enforceable right to trutIrl'ul information for any person, not just bona fide apartment seekers.
This logic also extends to § 3604(b), which prohibits discrimination against "any person" in
the terms or conditions of rentals and, like § 3604(d), does not require a bona fide offer.
Therefore, offering black testers apartments at higher rental rates than those offered to white
testers discriminates in the terms of rentals and violates the Act.
United States v. Balistrieri, 981 F.2d 916, 929 (7th Cir. 1992) (internal citations omitted) (pattern and
practice case brought by the government under the Fair Housing Act). See also Gilligan v. Jamco Dev.
Corp., 108 F.3d 246, 250 (9th Cir. 1997) (construing § 3613(a)(l)(A) as affording private causes of
action for those whose § 3604 statutory rights were violated).
181. Simms v. First Gibraltar Bank, 83 F.3d 1546, 1556 n.30 (5th Cir. 1996) (contrasting scope of 42
U.S.C. § 3604(b) with the Age Discrimination in Employment Act-in a disparate treatment case, the
ADEA requires that age be a "detenninative factOi"," whereas in an FHA case, race need only be a
result of the discrimination (i.e., they are not forced to borrow from another
lender at higher terms), they may be awarded emotional distress damages. '82
Where the plaintiff testers are unable to prove any damages, they are entitled as
a matter of law to nominal damages. 183 It is notahle that testers do not have
standing to bring discrimination claims under sections 1981 and 1982 of the
Civil Rights Act of 1866. 184
Courts may also grant standing to persons who are subjected to discriminatory advertising campaigns specifically targeting minorities for exploitation. 185
While claims usually involve minority under-representation (i.e., a preference
for whites),'86 an argument can be made that ads which employ a substantial
percentage of minority models convey a similarly discriminatory message. 187
significant factor); see also LeBlanc-Sternberg v. Fletcher, 67 F.3d 412, 425 (2d Cir. 1995) ("[A]
plaintiff can establish a prima facie case by showing that animus against the protected group 'was a
significant factor in the position taken' by the municipal decision-makers themselves or by those to
whom the decision~makers were knowingly responsive. If the motive is discllminatory, it is of no
moment that the complained-of conduct would be permissible if taken for nondiscriminatory reasons.")
(internal citations omitted).
182. Balistrieri, 981 F.2d at 931-932 (holding that while testers' evidence of emotional distress was
minimal, it was legally sufficient for ajrny damages award).
183. Even if a plaintiff has not proven actual compensable damages, sJhe is entitled to a nominal
damages award. See, e.g., LeBlanc-Sternberg, 67 F.3d at 431 ("It is plain error for the trial court to
instruct a jury only tllat, if the jury finds [a Civil Rights violation], it 'may' award such damages, rather
than that it must do so.").
.
184. In Fair Employment Council, the D.C. Circuit concluded that section 1981 does not provide
testers with standing. 28 F.3d at 1268. Further, the court distinguished the FHA from section 1981,
finding that the Havens decision has no bearing on tlle proper interpretation of section 1981. Id. See
also supra Part II.D (noting shortcomings of sections 1981 and 1982). But see Watts v. Boyd Properties,
Inc., 758 F.2d 1482, 1485 (11th Clr. 1985) (finding tester standing under § 1982).
185. 42 U.S.C. § 3604(c) (1994) (prohibiting notice, statements, or advertisements "with respect to
the sale or rental of a dwelling that indicates any preference, limitation, or discrimination based on race,
color, religion, sex, handicap, familial status, or' national origin, or an intention to make any such
preference, limitation, or discrimination").
186. See, e.g., Tyus v. Urban Search Mgmt, 102 E3d 256 (7th Cir. 1996) (addressing claim of
selective advertising where defendant used only white models in billboard and newspapers ads, and
failed to indicate it was an "equal housing opportunity provider" or display the Equal Opportunity
Logo); Ragin v. Harry MackIowe Real Estate Co., 6 F.3d 898 (2d Crr. 1993) (addressing claim that
defendants' newspaper ads depicted only white human models, hence depicting impermissible preference); Housing Opportunities Made Equal, Inc. v. Cincinnati Enquirer, Inc., 943 F.2d 644 (6th Crr.
1991) (similar claim); Spann v. Colonial Village, Inc., 899 F.2d 24 (D.C. Cir. 1990) (similar claim).
187. Ultimately, whether the ads are "discriminatory" is a question of fact to be determined by a
jury. See, e.g., Spann, 899 F.2d at 29-30 (holding that a 42 U.S.C. § 3604(c) violation is determined by
whether a "reasonable reader [would believe] that the natural interpretation of defendants' advertisements ... is that they indicate a racial preference"). As part of the evidence, plaintiffs may introduce
experts to testify about the detrimental effects of the advertising upon the target market See TYus v.
Urban Search Management, 102 F.3d 256, 263-64 (7th Crr. 1996) (finding reversible error to exclude
testimony of expert who would have testified about how an all-white advertising campaign affects
Mrican-Americans); cf Ragin v. Harry MackJowe Real Estate Co., 6 F.3d 898, 906 (2d Cir. 1993)
(holding that plaintiff need not present expert testimony to prove whether an ordinary reader would
have found a message of racial preference in the advertising).
TIle jury instruction may even specify the perspective from which "reasonableness" is judged. See
Tyus, 102 F.3d at 266 (holding that it is permissible for the court to instruct the jury to evaluate the
discriminatory nature of adveltising from the standpoint of an "ordinary African-American reader,"
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Specifically, in the context of a historically segregated lending system, ads
featuring minorities almost exclusively perpetuate the "reality" that there is one
lending system for whites and one for minorities. 188 This "steering" 189 of
potential borrowers limits the "integration" of the markets, enabling lenders in
the less-affluent minority markets to increase their stranglehold and opportunities for minority exploitation.
One could thus argue that Congress intended to prohibit minority overrepresentation in some circumstances because of its (ironically) discriminatory
effects. From tllis premise, one who has been exposed to such advertisements
would have "suffered injury in precisely the form tlle [FHA] was intended to
guard against, and therefore has standing to maintain a claim for damages under
the Act's provisions." 190 An organizational plaintiff could likewise claim injury
through a diversion of injury or frustration of purpose rationale.'91
2. Multiple Causes of Action
A plaintiff in a lending discrimination case under FHA can establish a prima
facie case in three ways. She may (1) prove discrimination directly; (2) prove
discrimination indirectly under tl,e McDonnell Douglas '92 burden shifting frameinstead of the "generic ordinary reader"). But cf Housing Opportunities Made Equal, Inc. v. Cincinnati
Enquirer, Inc., 943 F.2d 644, 649 (holding that a single newspaper ad featuring only white models does
not raise a factual question of discrimination under 42 U.S.C. § 3604(c), and that such an allegation
fails to state a cause of action).
188. TIus should be contrasted with the situation where a lustorically "white lender" utilizes
minority models in its advertising. In tIus circumstance, a reasonable person would likely perceive
minority over-representation as a sign that the lender has renolill-ced its discriminatory lending. Under
old HUD regulations, so long as there is "complementary advertising that is directed at other groups,"
it is unlikely that an inference of discriminatory preference would be found. See 24 C.ER. § 109.25(c)
(1995). But cf Housing Opportunities Made Equal, 943 F.2d at 650 (arguing thlil1 the discriminatory
message must stem from a "notice, statement, or advertiseme~t," and not from "a message separate
from and incidental to the individually placed advertisement"). In Housing Oppo'rtunities Made Equal,
the Cincinnati Enquirer had accepted over a twenty year period housing ads which almost always
featured whites.
189. Steering claims based on adveltising have been accepted for the purpose of asserting injury-in~
fact in the FHA redlining context. In Spann v. Colonial Village, Inc., an organizational plaintiff
successfully argued that discriminatory advertising is "a 'steering' method which discourages black
home buyers and renters before tIley ever reach a particular complex," hence requiring the organization
to expend more resources to identify and counteract such discouragement. 899 F.2d at 28.
190. Ragin v. Harry Macklowe Real Estate Co., 6 F.3d 898, 904 (2d Cif. 1993) (finding standing
even under the assumption that plaintiffs were not actively looking for an apartment, and were possibly
"combing the newspapers looking for these ads in order to bring a [section 3604(c)] action").
Presumably, even whites who have been exposed to such ads would have standing. In the insurance
redlining context, the Seventh Circuit held that a white homeowner living in a racially mixed
neighborhood, who was unable to renew his homeowner's insurance, could bring a claim under FHA.
The court held tIlat "[t]he race of the person complaining of impermissible redlining is in·elevant."
United Fann Bureau Mutual Ins. Co. v. Metropolitan Human Relations Comm'n, 24 F.3d 1008, 1015
(7th Cir. 1993).
191. Ragin, 6 F.3d at 905 (discussing diversion of resources theory). The D.C. Circuit requires
frustration of purpose. See discussion supra note 175.
192. McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973). See also Gamble v. City of
work;'93 or (3) prove discrimination under the disparate impact framework
established in Griggs v. Duke Power CO. '9' It is noteworthy that the disparate
impact theory is unavailable under sections 1981 and 1982. '95
Where there is direct evidence of discriminatory intent, a plaintiff can establish a "direct evidence" prima facie case, rather than using the McDonnell
Douglas burden-shifting framework. '9G This might be done with evidence that a
lending agent had used a racial slur indicating extreme dislike for the plaintiff
and her racial identity.'9? So long as the plaintiff can establish that she is an
"aggrieved person" 198 subjected to an "alleged discriminatory housing pracEscondido, 104 F.3d 300, 304 (9th Cir. 1997) ("We analyze FHA ... disparate treatment claims under
Title VII's three-stage McDonnell DouglaslBurdine test.").
193. The Seventh Circuit, however, has rejected the McDonnell Douglas framework for some FHA
cases. See Latimore v. Citibank Fed. Say. Bank, 151 F.3d 712, 714 (1998). According to the court,
while there is arguably an inference of racism when a qualified minority is passed over for promotion in
favor of a white (and hence McDonnell Douglas burden-shift may be appropriate), such an inference is
not proper in a "non-competitive" situation. The Seventh Circuit does not believe that minorities
seeking loans are actually competing with whites for loans. In the court's words:
A bank does not announce, "We are making a $51,000 real estate loan today; please submit
your applications, and we'll choose the application that we like best and give that applicant
the loan:' If a bank did that, and a black and a white each submitted an application, and the
black's application satisfied the bank's criteria of creditworthiness and value-to-loan ratio yet
the white received the loan, we would have a situation roughly parallel to that of a McDonnell
Douglas case. And when we have an approximation to such a situation, a variant of the
McDonnell Douglas standard may apply, as we shall see.... The Supreme Court has
reminded us that McDonnell Douglas was not intended to be a straiijacket into which every
discrimination case must be forced kicking and screaming.
[d. That is, McDonnell Douglas is not applicable in some loan contexts (although it may be applicable
in certain "McDonnell Douglas knock off" lending fact patterns, see 151 F.3d at 715). This reasoning,
however, does not necessarily extend to competitive situations such as housing sale or rental.
194. 401 U.S. 424 (1971).
195. See, e.g., Palmer v. Board of Educ. of Community Unit Sch. Dis1., 46 F.3d 682, 687 (7tll Cir.
1995) (explaining that section 1981 forbids disparate treatment, not disparate impact).
196. See Kormoczy v. U.S. Dep't of Hous. & Urban Dev., 53 F.3d 821, 824 (7th Cir. 1995) ("Where
direct evidence is used to show that a housing decision was made in violation of the statute, the burden
shifting analysis is inapposite."). See also International Bd. of Teamsters v. United States, 431 U.S.
324, 358 (1977) (Title VII context); McCarthy v. Kemper Life Ins. Companies, 924 F.2d 683, 686 (7tl1
Cir. 1991) (Title vn context); see also Saldana v. Citibank, No. 93-C-4164, 1996 WL 332451, at *2
(N.D. ill. June 13, 1996) (explaining the prima facie case for a "direct evidence" FHA claim).
"Direct evidence" has been defined as "evidence which, if believed, proves the existence of the fact
in issue without inference or presumption. So direct evidence of discrimination is powerful evidence
capable of making out a prima facie case essentially by itself." Jones v. Bessemer Carraway Med.
Center. 151 F.3d 1321, 1323 n.1l (11th Cir. 1998) (Title VII context).
197. In Cordova, State Farm, the employer, referred to one of the new hires as a "dumb Mexican."
The Ninth Circuit held that tins created a sufficient inference of discrimination (national origin).
Cordova v. State Farm Ins. Co., 124 F.3d 1145, 1149 (9th Crr. 1997). But cf Jones v. Bessemer
Carraway Med. Center, 151 F.3d 1321, 1323 (lIth Cir. 1998) (holding that racial statements made by
supervisor did not constitute direct evidence, and that it could not be infened that it was more likely
than not that plaintiffs tennination was based on racial criteria, in light of events preceding her
discharge); McCartllY v. Kemper Life Ins. Co., 924 F.2d 683 (7th Clr. 1991) (holding that anti-black
remarks by fellow employees are not enough for a direct-evidence prima facie case of discriminatory
discharge).
198. An "aggrieved person" is defined one that has "been injured by a discriminatory housing
r
tice," and can demonstrate this by a preponderance of evidence, then she may
prevail.
In cases where plaintiff lacks direct evidence of discrimination, she can still
proceed to show discrimination indirectly, under McDonnell Douglas.'99 The
prima facie case in the reverse redlining context200 would require a showing
that plaintiff (I) is a member of a protected class; (2) applied for and was
qualified for a loan; (3) was given grossly unfavorable terms; and tllat (4) the
lender continues to provide loans to other applicants with similar qualifications,
. f orth the pnma
.
faCle
'
but on significantly more favorable terms. 201 After settmg
case, tl,e burden shifts to defendant to articulate a legitimate, nondiscriminatory
reason for its action which is sufficient to rebut the presumption of di8crimination (but need not prove by preponderance),202 Assuming defendant meets its
burden, the plaintiff must prove by preponderance of evidence that the defen. pretext .203
dant ,s reason IS
Even with the assistance of the McDonnell Douglas framework, "[p]roof of
discriminatory motive is crucial to a disparate treatment claim.,,20' Demonstrating discliminatory intent, even indirectly (by attacking defendant's reasons as
pretext) can be difficult. One court has desclibed intent to discriminate as "a
chameleon, a puzzle, and possibly a chimera.,,205 For plaintiffs, therefore,
FHA's disparate impact theory can be advantageous. In advancing a claim under
practice." 42 U.S.C. § 3602(i) (1994). "Discriminatory housing practice" includes acts proscribed
under 42 U.S.c. § 3604 (1994).
199. See McDonnell Douglas Corp. v. Green, 411 U.S. 792, 802-804 (1973) (setting forth the
disparate treatment analysis in the context of a Title vn eIJ;lployment discrirnina~on ~laim). .
.
200. A prima facie case refers to "the plaintiff's burden of putting on a case-m-chief that l~ sufficle~t
to defeat a motion under Fed. R. Civ. P. 41(b) and thus to require the defendant to put on Its case ill
opposition." Cordova v. State Farm Ins. Co., 124 F.3d 1145, 1148 (9th Crr. 1997) ('I!-tle. ~ context).
See also Texas Dep't of Community Affairs v, Burdine, 450 U.S. 248,253 (1981) (mdlcatmg that to
establish a prima facie case; a plaintiff must offer evidence that "givers] rise to an inference of unlawful
discrimination").
.
201. This is the framework set forth in the McDonnell Douglas Title VII context, adapted to the Title
VOl context. It is worth noting that in some circuits, at least, .the plaintiff need not set forth a prima
facie case to survive a Fed. R. Civ. P. 12(b)(6) motion to dismiss. According to the Ninth Circuit,
"while the McDonnell DouglaslBurdine standard orchestrates tile burdens of proof in a Title VIIl case,
it does not dictate the required elements of a complaint." Gilligan'v. Jamco Dev. Corp. 108 F.3d 246
(9th Cir. 1997); see also Latimore v. Citibank Fed. Say. Bank, 151 F.3d 712, 715 (7th Cir. 1998) ("It is
always open to a plaintiff in a discrimination case to show in a conventional way, without relying on
any special doctrines of burden-shifting, that there is enough evidence, direct or circumstantial, of
discrimination to create a triable issue."); Ring v. First Interstate Mortgage, Inc., 984 F.2d 924, 926 (8th
Cir. 1993). The failure to plead the McDonnell Douglas prima facie case does not mean that t~e
plaintiff would be unable to advance direct evidence of discrimination, in which case the prima faCie,
case is irrelevant. 108 F.3d at 250. As such, "the validity of a fair housing complaint should be judged
by the statutory elements of an FHA claim ratller tllan tile structure of the prima facie case. The FHA
provides a private right of action for an 'aggrieved person' subjected to an 'alleged discriminatory
housing practice.' " Id.
202. See, e.g., Gamble v. City of Escondido, 104 F.3d 300, 305 (9th Cir. 1997).
203. See Gamble, 104 F.3d at 305.
204. Gomble, 104 F.3d at 305.
205. Village of Bellwood v. Dwivedi, 895 F.2d 1521, 1529 (7th Cir. 1989).
disparate impact, the plaintiff need not prove discriminatory intent, but may
instead show that the lender's "facially neutral" practices have a discriminatory
effect206 The plaintiff can establish a prima facie case by showing that (1)
defendant has a specific policy, procedure, or practice, which (2) has a greater
discriminatory impact on members of a protected class. 207
It is axiomatic that plaintiff mnst actually prove the disparate impact 20B The
FHA plaintiff needs to first identify the lending criteria that resulted in the
loan's exorbitant rates, or if this is not possible, demonstrate that the credit
scoring system, in its entirety, adversely impacts minorities. 209 While the pre-
206. See, e.g., Wards Cove Packing Co. v. Atonio, 490 U.S. 642, 645 (1989) (explaining that Title
VII proscribes "not only overt discrimination but also practices that are fair in form but discriminatory
in practice," and that a facially neutral employment practice may violate Title VII without evidence of
discriminatory intept); Eqllal Employment Opportunity Comm'n v. Steamship Clerks Union, 48 F.3d
594, 601 (1st Cir. 1995) ("It has long been understood that discrimination, whether measured
quantitatively or qualitatively, is not always a function of a pernicious motive or malign intent.
Discrimination may also result from otherwise neutral policies and practices that, when actuated in
real-life settings, operate to the distinct disadvantage of certain classes of individuals.")
Courts have unifonnly employed disparate impact theory, as developed from Title VIT, in the Title
VIn setting. See, e.g., Gamble v. City of Escondido, 104 F.3d 300, 306 (9th Cir. 1997) (explaining, in
FHA context, that "[d]emonstration of discriminatory intent is not required under disparate impact
theory"); Simms v. First Gibraltar Bank, 83 F.3d 1546, 1555 (5th Cir. 1~96) ("We agree that a violation
of the FHA may be established not only by proof of discriminatory intent, but also by a showing of
significant discriminatory effect."); RELMAN, supra note 176, at 2-51 (explaining that every circuit
court of appeals to address the question of whether the disparate impact test is applicable to Title vm
has concluded that it is); The Secretary of HUD's Regulation of the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), 60 Fed.
Reg. 61846, 61867 n.50 (1995) (explaining, in the course of implementing anti-discrimination regulations for Fannie Mae and Freddie Mac, that "[a]ll of the circuit courts, except for the D.C. Circuit
which has not considered the issue, have held that the Fair Housing Act includes claims based upon the
disparate impact theory. "). But cf Village of Bellwood v. Dwivedi, 895 F.2d 1521, 1533 (7th Cir. 1989)
("Section 3604 covers a variety of practices .... Some practices lend themselves to the disparate
impact method, others not. We cannot imagine the practice (innocent in intent, discriminatory in impact
.. ) on which a disparate impact case might be based in this case."). In Dwivedi, an organizational
plaintiff argued that a real estate brokerage finn and two if its employees impennissibly steered blacks
and whites in a manner to perpetuate segregation.
207. See, e.g., Simms v. First Gibraltar Bank, 83 F.3d 1546, 1555 (5th Cir. 1996); see also Equal
Employment Opportunity Comm'n v. Steamship Clerks Union, 48 F.3d 594, 601 (1st Cir. 1995)
(explaining the test somewhat differently: "In the disparate impact milieu, the prima facie case consists
of three elements: identification, impact, and causation.").
208. See, e.g., Wards Cove Packing Co. v. Atonio, 490 U.S. 642, 650 (1989) (explaining that it is not
sufficient to merely point to statistical disp8.lity in the workforce-the plaintiff must actually identify
the specific practice, and demonstrate through appropriate scientific methods, that the practice disproportionately impacts minorities); Gamble v. City of Escondido, 104 F.3d 300, (9th Cir. 1997) (explaining
that the plaintiff must "prove the discriminatory impact at issue; raising an inference of discriminatory
impact is insufficient").
209. Under the Civil Rights Act of 1991, a plaintiff in a Title VII suit may challenge an employer's
"decisionmaking process," if able to show that the individual elements of that process are inseparable
for analysis. 42 U.S.c. § 2000e-2(k)(l)(B)(i) (1994). See also Atonio v. Wards Cove Packing Co.• 10
P.3d 1485, 1491 (9th Cir. 1993).
The Home Mortgage Disclosure Act of 1975 ("HMDA"), which is applicable only to depository
institutions, requires that banks make available to the public data regarding its lending practices. See ~2
U.S.c. § 2803 (1994); 12 c.P.R, pI. 203 (1998) (implementiog regulations); see generally HMDA. 12
cise factors will vary depending on the case, the plaintiff might allege that
"neutral" factors such as home ownership in predominantly minority neighborhoods, blemished credit ratings, and low-income, result in exorbitant rate
schedules. 210
Second, the plaintiff will have to show, using sophisticated statistical analysis,
that the identified factor causes minorities to pay substantially higher rates and
fees for loans than whites. 21l In so doing, the plaintiff will have to define
appropriate comparison groups. While the statistical methods will vary given
the specific circumstances, the "applicant pool" method may be the most
appropriate. 2l2 Under this approach, the plaintiff would collect applicant data
U.S.C. §§ 2801-2810 (1994). The express purpose of the HMDA was to defer redlining practices and
other bad practices. See DENNIS & POTTINGER, supra. note 120, at' 8.05; 12 U.S.C. § 1201(b) (1994).
210. Brennan has encountered such disparate lending policies in his daily practice. He indicates that
persons with good credit, middle to high income, and $30,000 in equity will generally qualify for home
equity lines of credit (BELOCs). HELOCs do not have closing costs or points, have interest rates at
approximately prime (either slightly below or above), do not promote the sale of credit life insurance,
do not have balloon payments, and do not flip (the loans are not flipped because the borrower can
access additional equity without a new loan). Testinwny of William J. Brennan, Jr., supra note 2, at 88.
The situation is markedly different for persons with lower income and weaker credit ratings. These
individuals, for no legitimate business justification, are subject to entirely different lending systems:
A lower income person with less than perfect credit who may be elderly and/or a minority
with the same $30,000 equity is funneled into a predatory mortgage loan which has high
interest and points, expensive credit life insurance, a balloon payment, and other abusive
features. This loan is then frequently flipped two or more times, resulting in additional,
unnecessary costs to the homeowner. Since the collateral for both loans is 80% of the value of
the home, the slightly higher risk in the second loan cannot justify its much higher cost.
Testimony of William J. BrelUzan, Jr., supra note 2, at 88-89.
211. This may be shown by the so-called "80% rule," where protected groups should satisfy the
proffered criteria at rates at least 80% of whites. This EEOC rule has fTequently been utilized by courts,
but is only a rule of thumb and not binding. See Equal Employment Opportunity Comm'n v. Joint
Apprenticeship of Joint Indus. Bd. of Elec. Indus., 164 F.3d 89 (2d. Cir. 1998) (pin-point page number
citation for this decision, issued December 24, 1998, was not available at time of publication; the
decision is available at 1998 WL 896116, and the cited material is available at *5-*6) (explaining that
the 80% rule is inapplicable with regard to "fail-rates," if the number of persons failing the test is too
smail to be of statistical significance). The rule, in pertinent part, states:
A selection rate for any race, sex, or ethnic group which is less than four-fifths (4/5) (or eighty
percent) of the rate for the group with the highest rate will generally be regarded by the
Federal enforcement agencies as evidence of adverse impact, while a greater than four-fifths
rate will generally not be regarded by Federal enforcement agencies as evidence of adverse
impact. Smaller differences in selection rate may nonetheless constitute adverse impact, where
they are significant in both statistical and practical tenns....
29 C.P.R. § 1607.4D (1998).
212. In the seminal Wards Cove case, plaintiffs alleged that non-cannery jobs were filled predominantly by whites, while cannery jobs were filled predominantly by Filipinos and Alaska Natives, and
that the "reason for such a disparity was that the hiring criteria for non-cannery jobs disproportionately
disqualified minorities. In assessing whether the hiring criteria (nepotism, rehiring practice, lack of
objective criteria, separate hiring channels, and failure to promote from within) wielded disparate
impact upon minority groups, the Court held that the proper comparison groups were the racial
composition of tlle non-cannery jobs, and the racial composition of the qualified population in the
relevant labor market. See Wards Cove Packing Co v. Atonio, 490 U.S. 642, 650 (1989). On remand,
the Ninth Circuit affinned the district court's extrapolation [Tom census data that indicated the
from all of the lender's branches, including branches of parent and subsidiary
lending corporations. The plaintiff would then show that under the lender's
lending criteria, the percentage of "qualified" white applicants receiving terms
at the favorable rate scale significantly exceeds the percentage of "qualified"
minorities receiving such. The gist of the argument would be that "[I]ending
decisions, including the price of a loan, should be based on the qualifications
of the borrower and the resulting risk to the lender. Such decisions should not
be based in any way on race .... "213 Where the loan is secured by the
borrower's home (reducing the risk of the loan), there is no reason the minority
borrower should be subject to terms grossly less favorable to those afforded
whites. Stated differently, predatory lenders settle for one degree of mark-up
when dealing with white communities, but unjustifiably demand a grossly
higher mark-up (which is irrespective of risk), when dealing with minority
markets. 214
applicable labor market for the non-cannery jobs is 90% white. Atonio v. Wards Cove Packing Co., 10
F.3d 1485, 1497 (9th Cir. 1993). The Ninth Circuit found that plaintiffs' "applicant flow" data, which
suggested that 26% of the qualified persons were minority, was both over- and under-inclusive. The
court argued that the statistics did not indicate how many minorities were actually applying for
non-c~:ry ~ork. 10 ~.3d at .1498. Second, even if all the applications were for non-cannery positions,
tJle statlsncs did not differentiate between those who were qualified and those who were not qualified.
Id.
Indeed, establishing comparison groups is one of the most difficult elements of a disparate impact
case. A major problem with the applicant flow approach is that minorities may be deterred from even
applying for loans in the first place, because of the lender's past history of discrimination. Second, it is
conceiv~ble that applicant flow data may not be available, especially at unscrupulous firumcing
comparnes. HMDA, moreover, applies only to depository institutions.
Instead of applicant flow, a plaintiff could use general population statistics. Under tIns approach, if
50% of the population where the lender does business is minority, then 50% of those receiving lending
terms from the prevailing rate scales should be minorities. Of course, the census data may not be fully
indicative. It is conceivable, for instance, that a higher percentage of whites own homes than minorities,
and as such, that the 50% approximation would have to be adjusted. See Wards Cove, 490 U.S. at 650
n.6. Additionally, there may be differences between minorities' and whites' proclivity to seek loans in
the first place.
Courts have also accepted standard deviation evidence. That is, if the "actual result" is two to three
standard d~viations [TOm the "expected norm" (null hypothesis of equitable representation), then there
may be eVIdence probative of discriminatory intent. See, e.g., Ottaviani v. State Univ. of N.Y. at New
P~tz: 876 F.2d 3~5, .371-72 (2d Cir. 1989) (explaining, in Title VII context, that statistical analysis
yleldmg level of slgruficance at or below .05 is suspect, and a disparity of two standard deviation units
establis~es a threshold level of statistical significallce). Where there are many possible outcomes, such
as r.nu?tiple degrees ~f :everse redli~ng abuse .(i.e., a range of rate scales), then multiple regression
statistIcs may be adrmsslble. A regression analySIS extracts a systematic signal from "noise" in the data.
The more factors the regression model takes into account, the more probative. ld. at 367.
213. Long Beach Lender to Pay $3 Million for Allegedly Charging Higher Rates to African
Americans, Hispanics, Women and the Elderly (U.S. Dep't of Justice, Civil Rights Div., Washington,
D.c.), Sept. 5, 1996 (visited Feb. 13. 1999) <http://www.usdoj.gov/opaJprI1996/Sept96/429cr.htm>
(statement of ~ssistant Attorney General for Civil Rights Deval L. Patrick) (emphasis supplied).
214. Subpnme loans produce an average profit of 10.5%, while the profit margin for prime loans is
6%. Lubove, supra note 13, at 50. Recently, Leon Black, of Drexel Burnham fame, purch~sed
Weyerhaeuser Co. 's mortgage business for a substantial premium that shocked the market. He then sold
off the insurance and prime mortgage operations to focus exclusively on Weyerhaeuser's small
subprime mortgage lending business. It turns out Mr. Black got the last laugh. Today, Mr. Black:s
Upon plaintiff proffering its prima facie case, the defendant may attack the
statistical evidence as insufficient for establishing a prima facie case. 215 Alternatively, it can acknowledge the statistical disparity (and the sufficiency of the
prima facie case), and undertake the burden of going forward,216 or in some
circuits, the burden of persuasion,217 in establishing "business necessity" for
the practice. 218 The defendant would have to explain how the lending criteria,
which may identify slightly higher risk, justifies the substantially higher cost of
the loan.
The precise level of justification required is unclear, as Congress overruled
the business necessity standard set forth in Wards Cove with the Civil Rights
Act of 1991, but failed to explain what the standard is. 219 As such, there are
subprime lending business is the nation's largest wholesale originator of sUbprime mortgage loans from
outside brokers. ld.
215. Pfaff v. U.S. Dep't of Hous. & Urban Dev., 88 F.3d 739, 746 (9tll Cir. 1996) ("A party charged
with discrimination may diffuse a prima facie case against him, and hence avoid the need to supply a
legally sufficient, nondiscriminatory reason in rebuttal, by successfully challenging the statistical basis
of the charge."). Alternatively, the defendant could attack other elements of the prima facie case--e.g.,
it might argue that the identified practice doesn't exist. See Equal Employment Opportunity Comm'n v,
Steamship Clerks Union, 48 F.3d 594, 602 (1st Cir. 1995) (indicating that the defendant might attack
the identification, impact, and causation elements ofllie prima facie case).
216. There is considerable confusion as to defendant's precise burden. Wards Cove required the
plaintiff to bear the burden of persuasion throughout the litigation. See Wards Cove Packing Co. v.
Atonio, 490 U.S. 642, 659 (1989). The Civil Rights Act of 1991, however, purported to restore
the business necessity test to pre-Wards Cove. See 42 U.S.C. § 2000e-2(k) (1994). Some circuit
courts believe that Wards Cove;s holding that the plaintiff bears the burden of persuasion throughout
the litigation remains good law (i.e., was not statutorily overridden). See Mountain Side Mobile
Estates Partnership v. Secretary of Hous. & Urban Dev., 56 F.3d 1243, 1254 (10th Cir. 1995) (applying
to the FHA context an understanding that Griggs compels the defendant to produce evidence of
"genuine business need," while holding that the "ultimate burden of proving ... discrimination ...
remains with the plaintiff at all times") (citing Watson v. Fort Worth Bank & Trust, 487 U,S. 977;987
(1988).
217. In Fitzpatrick, the Eleventh Circuit held that the Civil Rights Act of 1991 overruled Wards Cove
with respect to the burden of persuasion. The court thus held that "once a plaintiff makes out a prima
facie case, the full burden of proof shifts to the defendant who must demonstrate business necessity in
order to avoid liability." Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1117 (11th Cir. 1993). See also
Toledo Fair Hous. Center v. Nationwide Mutual Ins. Co., No. CI93-1685, 1998 WL 896667, at *6 (Ohio
Com. PI. Apr. 11, 1997) ('"'After some initial dispute, courts now hold that the defendant has the burden
of showing business necessity. ").
218. See, e.g., Mountain Side Mobile Estates Partnership v. Secretary of Hous. & Urban Dev., 56
F.3d 1243, 1254 (10th Cir. 1995).
219. Wards Cove had significantly weakened'the business necessity defense, permitting disparate
impact and not requiring "necessity." Even if the practice was not necessary, it was permissible so long
as it "served, in a significant way, the legitimate employment goals of the employer." Wards Cove
Packing Co. v. Atonio, 490 U.S. 642, 659 (1989). The Civil Rights Act of 1991, however, expressed the
intent "to codify the concepts of 'business necessity' and 'job related' enunciated by the Supreme Court
in Griggs v. Duke Power Co. and other Supreme Court decisions prior to Wards Cove Packing Co. v.
Antonio." Pub. L. No. 102-166, § 3,105 Stat. 1071, 1071 (1991) (internal citations omitted). See also
Note, The Civil Rights Act of 1991: The Business Necessity Standard, 106 HARV. L. REv. 896, 903-06
(1993) ("On the issue of business necessity, the Act merely returns the courts to where they were just
prior to Wards Cove, and appears to provide little guidance as to what direction they should take from
there. The courts are saddled, instead, with a rich but uncertain legislative Instory arising from two
years of complicated political maneuvering. ").
----J
myriad interpretations of "business necessity" as currently codified: 220 "compelling need;,,221 "manifest relationship;"222 "genuine business need;,,223 "legitimate, nondiscriminatory rationale;,,224 and "demonstrably necessary.,,225 Of
these, the "legitimate, nondiscriminatory rationale" and "manifest relationship"
tests appear to be the least demanding. 226
The rules promulgated by the Federal Reserve Board pursuant to the Equal
Credit Opportunity Ace27 are also not particularly illuminating 228 Willie the
Board had indicated tbat "legitimate business need" might be a proper interpretation of 12 C.ER. § 202.6(a)(2) (proillbiting discrimination),229 the Board has
220. 42 U.S.c. § 20003-2(k)(i) (1994) (requiring the defendant "to demonstrate that tl,e challenged
practice is job related for the ]Xlsition in question and consistent with business necessity").
221. Bradley v. Pizzaco of Nebraska, Inc., 7 F.3d 795, 797 (8tll Cir. 1993) (holding that defendant
had failed to establish a business justification for not permitting a medical exception to its no-beard
policy, which it had promulgated for image and marketing reasons, and which wielded disparate impact
upon African Americans with a certain sldn condition). The court purported to use the standard set forth
in Griggs v. Duke Power, 401 U.S. 424, 431 (1971). In the words of the Eighth Circuit, the test is
whether there exists" 'compelling need' for the challenged policy, and [there is no} effective alternative policy that would not produce a similar disparate impact." [d.
222. Smith v. City of Des Moines, 99 F.3d 1466, 1471 (8th Cir. 1996) (citing Griggs, 401 U.S. at
432) (holding that fire-fighter physical fitness test to detennine suitability for wearing a self-contained
breathing apparatus, despite possible disparate impact upon elderly fire-fighters, is business necessity);
see also Mountain Side Mobile Estates Partnership v. Secretary of Hous. and Urban Dev., 56 F.3d 1243
(10th Cir. 1995). In Mountain Side, the Tenth Circuit held that the business necessity test, in the Fair
Housing Act context, required a "manifest relationship to the housing in question." 56 F.3d at 1254.
The court specifically rejected the "compelling need or necessity" standard, arguing that "this degree
of scrutiny would be almost impossible to satisfy." [d.
223. Mountain Side, 56 F.3d at 1254 (citing Griggs, 401 U.S. at 432).
224. Equal Employment Opportunity Comm'n v. Steamship Clerks Union, 48 F.3d 594, 602 (5th
Cir. 1995) (implying that the plaintiff retains the burden of persuasion at all times, because even if
defendant fails to "counter the plaintiff's prima facie case," the factfinder is "not necessarily compelled" to enter judgment for the plaintiff).
225. Fitzpatrick v. City of Atlanta, 2.F.3d 1112, 1119 (11th Cir. 1993) (holding that defendant had
carried its burden of demonstrating that a no-beard rule for fire-fighters was a business necessity, for
safety reasons, despite the policy's disparate impact upon African Americans with a certain skin
condition).
226. See Mountain Side, 56 F.3d at 1254 (explaining that the "compelling need or necessity" test is
more stringent than the "manifest relationship" test).
227. Equal Credit Opportunity Act, 15 U.S.C. §§ 1691-1691e (1994).
228. HUD has not promulgated any rules under HFA, hence this analysis of the rules promulgated
under the EqUal Credit Opportunity Act.
229. The text of § 202.6(a)(2), in relevant part, reads "a creditor may consider in eValuating an
application any information that the creditor obtains, so long as the information is not used to
discriminate against an applicant on a prohibited basis." 12 C.ER. § 202.6(a)(2) (1998). The official
commentary in the Federal Register explained:
even though the creditor has no intent to discriminate and the practice appears neutral on is
face, unless the creditor practice meets a legitimate business need that cannot reasonably be
achieved as well by means that are less disparate in their impact [it may be prohibited}. For
example, requiring that applicants have incomes in excess of a certain amount to qualify for
an overdraft line of credit could mean that women and minority applicants will be rejected at a
higher rate than men and non-minority applicants. If there is a demonstrable relationship
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since declined additional comment on the business necessity test, instead deferring to tl,e (vague) Civil Rights Act of 1991.230 The only additional guidance is
the Board's definition of what constitutes an "empirically derived, demonstra231
bly and statistically sound" credit scoring system.
It is possible that a court
might find that lending criteria which meet this standard also meet the business
necessity test.
Assuming that the plaintiff bears the burden of persuasion at all times,232 the
jury is entitled, though not compelled, to enter judgment for the plaintiff, where
233
Where defendant has
the defendant fails to rebut the prima facie case.
rebutted the plaintiff's prima facie case (or in some courts, carried the burden of
persuasion), however, the plaintiff may still prevail by demonstrating that some
other practice, Witll less disparate. impact, was available and would have served
the defendant's interests equally well?34 This should not be difficult for the
reverse-redlining victim to show.
The caveat to this analysis rests with predatory lenders that lend exclusively at
sub-prime terms. These corporations provide minorities and whites with the
same unfavorable lending terms, making it difficult to show disparate impact.
So long as the lender is able to resist the temptation of servicing wllltes at prevailing market terms,235 discrimination, in the legal sense, is hard to establish.
between the income requirement and creditworthiness for the level of credit involved,
however, use of the income standard would likely be permissible.
Equal Credit Opportunity; Revision of Regulation B; Official Staff Commentary, 51 Fed. Reg. 48108,
48050 (1985).
230. In the Board's words:
The Board recognizes that this is an evolving area of law, one in which creditors and
consumers alike would benefit from more specificity. However, given that the Board did not
propose any amendments to this section of the commentary, the only change to the existing
commentary is the addition of a reference to the Civil Rights Act of 1991, which codifies the
standards used for disparate impact under Title VII. The Board will consider addressing these
issues further in future commentary proposals.
Equal Credit Opportunity, 60 Fed. Reg. ·29965, 29967 (1995) (revising official commentary to Regulation B, 12 C.P.R. pI. 202).
231. 12 C.P.R. § 202.2(p)(I) (1998). These regulations are relatively demanding, as they must be
"[b}ased on data that are derived from an empirical comparison of sample groups or the population of
creditworthy and non~creditworthy applicants who applied for credit within a reasonable preceding
period of time," § 202.2(p)(1)(i); "[d}eveloped for the purpose of evaluating the creditwortlliness of
applicants with respect to the legitimate business interests of the creditor utilizing the system (including, but not limited to, minimizing bad debt losses and operating expenses in accordance with the
creditor's business judgment)," § 202.2(p)(1)(ii); and be revalidated over time, § 202.2(p)(I)(iv),
among other requirements.
232. In courts where the burden of persuasion shifts to the defendant, the plaintiff would presumably
be entitled to a judgment if defendant fails to meet its burden.
233. See Equal Employment Opportunity Comm'n v. Steamsllip Clerks Union, 48 E3d 594, 602
.
(1995).
234. See, e.g., Steamship Clerks Union, 48 F.3d at 602; Wards Coy'e Packing Co. v. Atonio, 490 U.S.
642,660-61 (1989).
235. Indeed, whites, as a group not subject to discrimination,. are able to tum elsewhere for their
3. Potential Remedies
The 1988 amendments to the FHA have "had a substantial effect on the
availability of remedies.,,236 A plaintiff may now seek equitable remedies such
as injunctions or restraining orders,23? compensatory and punitive damages,Z38
and attorneys' fees and costS.Z39 The Supreme Court has conferred broad
discretion to lower courts in "fashioning an effective eqnitable remedy."24o
Injunctive relief should be structured to "achieve the twin goals of assuring that
the [FHA] is not violated in the future and removing any lingering effects of
past discrimination."241 Under a predatory lending claim, the court may order a
consent decree requiring the defendant's employees to sign a non(1iscrimination
statement, mandating record-keeping to enable judicial monitoring, and requiring fair housing law training for employees. 242
Although equitable relief may deter a predatory lender fTom future discriminatory practices, victims may not have the incentive to bring a claim if they are
not reimbursed for the hann suffered. Compensatory damages serve the function of "putting the [victim] in the same position he would have been in had
there been no injury,,,z43 and providing incentives for the victim to file a claim.
A plaintiff is entitled to recover damages for out-of-pocket expenses, humiliation, embarrassment, mental anguish, emotional distress, and loss of civil rights
incurred as a result of the defendant's actions 244
The most potent weapon in deterring predatory lending is likely tl,e threat of
punitive damages. Originally, punitive damages under the FHA were capped at
$1,000?45 However, the 1988 amendments eliminated this limitation246 and in
recent years, punitive damage awards have escalated. 24? Like any other business, predatory lenders are motivated by profitability. Unfortunately, foreseeable
borrowing needs, and will likely not turn to predatory lenders who charge exorbitant interest rates and
fees. As such, by failing to offer prevailing market terms to whites, the predatory lender, its branchoffices, and its parent and subsidiary corporations, would have to forego serving whites, who make up
the vast majority of the population, and are a significant market.
236. ZUCKERMAN ET AL., supra note 124, at 270.
237. 42 U.S.c. § 3613(c)(I) (1994).
23S. Id.
239. Id. § 3613(c)(2).
240. Jones v. Alfred Mayer Co., 392 U.S. 409, 414 n.13 (196S).
241. Marable v. Walker, 704 F.2d 1219, 1221 (11th Cir. 1983); see also United States v. Jamestown
Center-in-the-Grove Apartments, 557 F.2d 1079, 1081 (5th Cir. 1977) ("Relief for violations of Fair
Housing Act should be aimed toward insuring that no future violations of the Act occur and removing
any lingering effects of past discrimination.").
242. ZUCKERMAN ET AL., supra note 124, at 284.
243. Id. at 277 (quoting Lee v. Southem Home Sites COJp., 419 F.2d 290, 293 (5th Cir. 1970».
244. RELMAN, supra note 176, at 6-1.
245. Di Lorenzo, supra note 56, at 1763 (discussing the reasons that enforcement of the FHA was
weak prior to the 1988 amendments).
246. See 42 U.S.C. § 3613(c)(I) (1994) (permitting the comt to award actual and punitive damages
for a finding of discriminatory housing practice).
247. RELMAN, supra note 176, at 6-23.
compensatory damages may merely be viewed by defendants as operating costs.
Consequently, the best way to instigate reform of discrintinatory lending practices is to elintinate the potential for profitability by hitting the defendants
where it really hurts: in the wallet?48 Courts will do a case-by-case inquiry into
the defendant's culpability when determining the amount of punitive damages
that will sufficiently punish the defendant and deter the defendant from future
wrongdoing 249
The FHA also entitles the plaintiff in a predatory lending claim to reasonable
attorneys' fees and costs if she prevails. 250 A plaintiff will be considered the
251
"prevailing" party if she succeeds on any significant issue in the case
Unlike
section 1982, which allows the defendant to recover attorneys' fees, only the
252
plaintiff may qualify to recover attorneys' fees under the FHA
Although a
losing plaintiff will rarely be assessed the defendant's attorney's fees under
section 1982, eliminating this possibility in FHA claims may invite victims of
predatory lending to file suit who would otherwise be discouraged from doing
so. 253
4. Continuing Violations Docrrine
The statute of limitations has a great impact on the number of suits filed
against a predatory lender. The shorter the limitation period, the greater the risk
that potential plaintiffs will be disqualified. Pursuant to the 1988 amendments,
the statute of limitations under the FHA was extended from 180 days to two
years?54 However, the court must determine the point upon which the statute
begins to toll before it can consider whether or not the claim is barred.
In Havens Realty Corp. v. Coleman, the Supreme Court found that when a
plaintiff challenges an unlawful practice under the FHA, continning violations
of the practice are afforded a more liberal analysis than isolated acts of
discrimination?SS Under the FHA, the statute of limitations commences after
the alleged discriminatory housing practice occurred. 256 The defendant in Ha248. "II]t is quite clear that the central purpose of the [Fair Housing Act] is to accelerate the
eradication of housing disclimination acrOSS the country by making such conduct prohibitively expensive." Id. at 6-26.4.
249. Courts differ as to the requisite culpability for punitive damages. Some courts require knowledge of the discriminatory practice while others find that willful or reckless disregard of the plaintiff's'
rights will walTant pecuniary punishment of the defendant. Id. at 6-20.
250. 42 U.S.C. § 3613(c)(2) (1994).
251. RELMAN, supra nole 176, at 6-31 (citing Hensley v. Eckerhart, 461 U.S. 424, 433 (1983».
252. The courts have read a "double standard" into section 1982 under which there is no differentiation between a prevaili.ng defendant and plaintiff. Schwemm, Mortgage Lending Discrimination Law,
supra note 153, at 329 (citi.ng Roadway Express, Inc. y. Piper, 447 U.S. 752, 762 (1980».
253. Id. a1330.
254. 42 U.S.C. § 3613(a)(l)(A) (1994). A private complaint to HUD has a statute of limitations of
one year. 42 U.S.C. § 361O(a)(I)(A)(i) (1994).
255. 455 U.S. 363, 3S1 (1982).
256. 42 U.S.C. § 3610(a)(I)(A)(i) (1994). See also Thelma A. Civens, The Cantinuing Walatian
Theory and Systematic Discrimination: In Search of a Judicial Standard for Timely Filing, 41 VAND. L.
yens argued that each discrete act of housing discrimination constituted an
"occurrence. ,,257 However, the Supreme Court held that in order to meet the
broad remedial intent of the FHA in eliminating systematic discrimination, a
claim for continuing violations commences at the time of the last occurrence of
the discriminatory practice. 258 The court reasoned that "[w]here the challenged
violation is a continuing one, the staleness concern disappears.,,259 Consequently, a plaintiff under a reverse redlining claim will not necessarily be
precluded from filing suit even if it has been over two years since she was
personally discriminated against. Instead, the court will focus on whether the
predatory lending practice by the defendant, irrespective of the plaintiff, has
occurred within the past two years. For example, if victim X was targeted by
Predatory Lender Mortgage Co. four years ago, but victim Z was targeted only
one year ago, then victim X will still have a viable claim under the continuing
violations doctrine.
V. CONCLUSION
Over the past four decades, significant strides have been made in overcoming
blanket refusals of lending institutions to extend mortgage loans in minority
communities. Today, discriminatory lending practices, although egregious, are
not as apparent. Predatory lenders conceal reverse redlining practices under the
guise of opportunities to minorities who would not otherwise be able to obtain
financing. In reality, predatory lending has resulted in financial and psychological distress for its victims.
While numerous legal options might be used to address this problem, none
has been able to provide a consistently viable remedy. Some, such as tl,e CRA
and TILA, have the potential to uncover and rectify some predatory lending
practices, but they lack sufficient bite to be tmly useful as deterrents. The CRA
provides a significant cause of action, but does not provide adequate standing
for certain groups, such as language minorities, testers, and housing organizations. Similarly, sections 1981 and 1982 of the Civil Rights Act of 1866 have
relatively strict standing requirements .and do not allow for disparate impact
claims. Finally, the doctrine of unconscionability, while seemingly invented for
such cases, is too ambiguous to rely on in predatory lending cases.
In contrast to the options described above, the FHA has great potential in
REv. 1171, 1183-84 (1988). It should be noted that Havens was decided prior to the 1988 amendments,
thus the statute of limitations period was 180 days under section 3612(a). See id. at 1182.
257. Coles v. Havens Realty Corp., 633 F.2d 384, 385 (4tll CiT. 1980), modified, 455 U.S. 363
(1982).
258. Havens Realty Corp. v. Coleman, 455 U.S. 363, 380-81 (1982).
259. Havens, 455 U.S. at 380.
reverse redlining cases. The FHA has broad standing requirements; multiple
causes of action, including disparate impact claims; strong remedial potential;
and the continuing violations doctrine. Because of these, the FHA stands out as
the most viable means to remedy the scourge of predatory lending.