New Jersey Case May Upend Home Loan Discrimination Rules

New Jersey Court Case Might Overturn Housing Loan Bias Rules
A fight between the government and residents of what remains of Mount Holly Gardens has now reached the U.S. Supreme Court, which may decide in the next several weeks whether to take up a case with nationwide implications for the housing industry. Photographer: Andrew Harrer/Bloomberg

The remaining structures form a patchwork amid vacant lots, where once there were row upon row of houses built for New Jersey’s returning World War II veterans and their growing families.

Some boarded-up homes have red signs tacked on the front saying “Owned by Mount Holly Township -- NO TRESPASSING.” Others have signs, in the style of a real estate agent’s, that say “This House NOT For Sale.”

A fight between the government and residents of what remains of Mount Holly Gardens has now reached the U.S. Supreme Court, which may decide in the next several weeks whether to take up a case with nationwide implications for the housing industry. The court deferred action on the case today.

Civil rights advocates are battling the industry over whether the 1968 Fair Housing Act authorizes discrimination suits even without allegations of intentional bias. Lower courts have said suits can claim that a government policy or company lending practice has a discriminatory effect, known as “disparate impact,” even if that wasn’t the intent.

Mount Holly has been buying up what it says had become a blighted, high-crime neighborhood, with an eye toward redevelopment. The opponents say the effort has hurt black and Hispanic residents, devastating the township’s only predominantly minority neighborhood.

Bank Settlement

Although the Mount Holly case involves municipal action, the U.S. Justice Department also enforces the disparate impact doctrine against financial institutions. It cost big banks dearly.

In December 2011, Bank of America Corp. settled a case of alleged discrimination against black and Hispanic borrowers for $335 million. And in July, Wells Fargo & Co. paid $125 million to wrap up claims it steered minority borrowers into expensive subprime loans. SunTrust Banks Inc. paid $21 million in May over similar claims.

The statute lacks the language supporting this doctrine, which Congress affirmatively included in other laws, so it shouldn’t apply, said Jeffrey Naimon, a banking attorney with BuckleySandler LLP. The courts have disagreed.

The position of civil rights groups has been, “‘It’s always been in the law, so get over it,’” Naimon said in an interview. “But that is not right.”

Undermining Intent

“Allowing disparate impact claims under the FHA would render illegal many legitimate governmental and private activities designed to promote the general welfare of the community,” Mount Holly argued in its appeal to the Supreme Court.

Kenneth Goldman, director of litigation for South Jersey Legal Services, which represents a group challenging the town’s actions, said the redevelopment plan undermines the intent of the Fair Housing Act.

The case started in 2002, when the township began offering owners $30,000 to $50,000 per home, he said. Out of more than 250 attached dwellings, about 70 remain and 35 families still reside in the Holly Gardens area, Goldman said.

Even though it has racked up $18 million in debt, the township has yet to build new homes and work has been halted because of a lack of funds.

“We’re not saying you can’t redevelop a minority community,” he said. “But they’ve got to at least justify their actions and go through an analysis or process to make sure that they are doing it in a way that is going to have the least amount of disruptive impact on the community.”

Mostly Vacant

Originally built in groups of eight townhomes with alleys in the back, one or two homes now remain in each section. The still-standing red-brick homes have black or tan patches on the sides where they had been attached to neighboring dwellings.

Most appear vacant. A few have children’s toys and tricycles in front. Screen doors swayed in the October wind last week. There are holes in the ground, sidewalks are ripped up in front of many homes and the streets are pocked with potholes. Empty Budweiser bottles and a finished half-pint of Hennessy are strewn in one lot and stray pieces of litter can be seen at times in gutters. The Gardens is ringed by two schools and several churches.

Antonio Delgado, 47, who works as a welder in nearby Philadelphia, said he’s lived in the Gardens for 13 years. He said the township’s argument that the neighborhood was a blighted haven for crime is overstated. He said he pays $575 a month for the two-bedroom rowhouse he rents on Martin Avenue, which the landlord sold to the town a couple of years ago. His wife has begun looking for work, and they’re hoping to move out.

Sent Them Away

“They should have just fixed everything up and let the township rent all the buildings out,” said Delgado, who said he splits his time between the house and staying with family members in the city during the work week.

“They took all the elderly people out of here and sent them to God knows where,” he said, as he showed what he called a poor patching job after crews demolished five or six attached houses. In addition to working-class people, poor residents and the elderly, he said two shelters for the homeless were displaced.

“They were pushing out the people who lived here so this could be more productive money-wise for them,” Delgado said. “You tell me, how’s a husband and wife who’ve lived here for 35 years and paid off their mortgage going to pay off another one they can’t even afford? When they can’t pay, what are they going to do? They kick ‘em out.”

New Regulator

The disparate impact doctrine has drawn additional attention over the past year because a new regulator, the Consumer Financial Protection Bureau, adopted it. The CFPB, created by the Dodd-Frank financial regulatory overhaul of 2010, handles enforcement of the Equal Credit Opportunity Act, the law barring discrimination in all types of lending.

As a result, it will now be supervising the roughly 110 largest banks in the country -- those with more than $10 billion in assets -- for compliance with federal consumer protection laws. It will also supervise many nonbank financial firms, such as mortgage originators.

“They did it to rattle sabers and make a point,” said Richard Riese, a senior vice president of the American Bankers Association’s Center for Regulatory Compliance. “But really what they did was adopt what was already there.”

However laudable the goal, bank lawyers argue that the disparate impact doctrine disrupts their ability to calibrate the risk that a borrower defaults, because any change to the terms of a loan could have a discriminatory effect.


“It makes every lender vulnerable to discrimination claims unless they make every loan to everybody the same way,” Naimon said. “It puts risk-based pricing, which is the way lending is supposed to work, very much at risk.”

When the issue is municipal policy, fair lending groups have argued that cities and towns have sometimes made minority groups bear the burden -- in the form of fewer lower-income housing choices -- of their redevelopment policies.

“In many cases, this would be called gentrification,” said David Berenbaum, chief program officer at the National Community Reinvestment Coalition.

Mount Holly could have chosen to start with “less drastic” options, such as more selective demolition, greater subsidies for relocation, or rehabilitating more units rather than displacing people, Goldman said. The township’s reliance on eminent domain -- the threat of using the law to take the properties -- was a mistake, he said.

“The people believed they didn’t have a choice,” he said. “So a lot of people sold under the threat of eminent domain for 30, 40 or 50 thousand dollars.”

Meanwhile, the area’s property has become even less valuable. “Whatever condition the Gardens was in when this started in 2002, they made it extremely worse by aggressively acquiring properties and demolishing them while families were still living there,” he said. “This is probably the textbook case in how not to do redevelopment,” Goldman said.

The case is Township of Mount Holly v. Mount Holly Gardens Citizens in Action, 11-1507.

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