Mcglawn v. Penn. Human Relations Commission: Notes + Questions

1. Some commentary on unaffordable mortgages asks “why would borrowers take out loans that were doomed to foreclosure?” Does the opinion offer any insights into this question? See Oren Bar-Gill, The Law, Economics and Psychology of Subprime Mortgage Contracts, 94 Cornell L. Rev. 1073 (2009); see also Jeff Sovern, Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers, 71 Ohio St. L.J. 763 (2010) (arguing that the explanation of key terms, even in non-predatory loans, was simply insufficient for ordinary borrowers to understand). Here’s another question: “why would lenders give out loans that were doomed to foreclosure?” As it turns out, given the collapse of the housing market, most foreclosures do not return enough to the lender to pay back the initial loan.

2. Resistance to helping homeowners at risk of foreclosure often focuses on the problem of “moral hazard” – if people weren’t forced either to pay back the loans on the terms on which those loans were granted or to lose their homes, some argued, that would encourage irresponsible borrowing. More broadly: when we seek to hold one party responsible for harm, we often make another party less responsible. As a result of the subprime mortgage collapse, many banks failed or were bailed out by the federal government. However, homeowners generally were not bailed out.

3. For some larger context, consider this excerpt from Ta-Nehisi Coates’ The Case for Reparations, Atlantic, May 2014:

In 2010, Jacob S. Rugh, then a doctoral candidate at Princeton, and the sociologist Douglas S. Massey published a study of the recent foreclosure crisis. Among its drivers, they found an old foe: segregation. Black home buyers – even after controlling for factors like creditworthiness – were still more likely than white home buyers to be steered toward subprime loans. Decades of racist housing policies by the American government, along with decades of racist housing practices by American businesses, had conspired to concentrate African Americans in the same neighborhoods. … [T]hese neighborhoods were filled with people who had been cut off from mainstream financial institutions. When subprime lenders went looking for prey, they found black people waiting like ducks in a pen.

“High levels of segregation create a natural market for subprime lending,” Rugh and Massey write, “and cause riskier mortgages, and thus foreclosures, to accumulate disproportionately in racially segregated cities’ minority neighborhoods.”

Plunder in the past made plunder in the present efficient. The banks of America understood this. In 2005, Wells Fargo promoted a series of Wealth Building Strategies seminars. Dubbing itself “the nation’s leading originator of home loans to ethnic minority customers,” the bank enrolled black public figures in an ostensible effort to educate blacks on building “generational wealth.” But the “wealth building” seminars were a front for wealth theft. In 2010, the Justice Department filed a discrimination suit against Wells Fargo alleging that the bank had shunted blacks into predatory loans regardless of their creditworthiness. This was not magic or coincidence or misfortune. It was racism reifying itself. According to The New York Times, affidavits found loan officers referring to their black customers as “mud people” and to their subprime products as “ghetto loans.”

“We just went right after them,” Beth Jacobson, a former Wells Fargo loan officer, told The Times. “Wells Fargo mortgage had an emerging-markets unit that specifically targeted black churches because it figured church leaders had a lot of influence and could convince congregants to take out subprime loans.”

In 2011, Bank of America agreed to pay $355 million to settle charges of discrimination against its Countrywide unit. The following year, Wells Fargo settled its discrimination suit for more than $175 million. But the damage had been done. In 2009, half the properties in Baltimore whose owners had been granted loans by Wells Fargo between 2005 and 2008 were vacant; 71 percent of these properties were in predominantly black neighborhoods.

 4. African-American and other minority borrowers were disproportionately steered to expensive subprime loans even though they qualified for cheaper conventional loans – high-income African American borrowers were six times as likely to get subprime loans as white borrowers with similar incomes. However, it is not the case, as is sometimes asserted, that unwise loans to African-Americans driven by federal mandates for equality in lending were responsible for the crash. In fact, institutions subject to federal fair lending rules made loans which were less likely to default than loans from institutions that were not subject to such rules. David Min, Faulty Conclusions Based on Shoddy Foundations (Feb. 2011) National Consumer Law Center, Why Responsible Mortgage Lending Is a Fair Housing Issue (Feb. 2012) (https://www.nclc.org/images/pdf/credit_discrimination/fair-housing-brief.pdf).

5. In recent years, legislatures and regulators have attempted to regulate mortgage lending to stamp out the worst origination abuses, such as the yield spread premium. Much regulation focuses on the concept of “suitability”: loans that the borrowers are likely to be able to repay, rather than loans based merely on the market value of the house. Loans based on the value of property alone, without sufficient attention to borrower characteristics, encouraged lenders to believe that they could profit even in case of a default, or sometimes that they could profit even more from default than from payment. In 2014, the Consumer Financial Protection Bureau (CFPB) issued rules on high-cost loans and homeownership counseling, implementing the Home Ownership and Equity Protections Act and subsequent additions. (http://www.consumerfinance.gov/regulations/high-cost-mortgage-and-homeownership-counseling-amendments-to-regulation-z-and-homeownership-counseling-amendments-to-regulation-x/) Under these rules, loans considered “high cost” are subject to a number of limitations; high cost loans are those that specify high interest rates, high fees rolled into the mortgage amount (as in McGlawn), or prepayment penalties that last more than 36 months or exceed more than 2% of the prepaid amount. Under the new rules, for high-cost loans, balloon payments are generally banned, with limited exceptions. Creditors are prohibited from charging prepayment penalties and financing points and fees. Late fees are restricted to four percent of the payment that is past due, and certain other fees are limited or banned. Before a lender gives a high-cost mortgage, they must confirm with a federally approved counselor that the borrower has received counseling on the advisability of the mortgage.

6. Whether or not borrowers are seeking high-cost loans, lenders are now subject to a rule requiring them to assess a borrower’s ability to repay, though that rule does not cover home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans. The lender must not use a “teaser” or introductory interest rate to calculate the borrower’s ability to repay; for adjustable-rate mortgages, it must consider ability to repay under the highest possible rate allowed by the mortgage. Certain so-called “plain vanilla” mortgages – fixed-rate, fully amortized (with no balloon payments) loans for no longer than 30 years – are presumptively acceptable under the regulations. In addition, lenders have to make counseling information available to all borrowers. Although loan information remains complex, the CFPB has tested different versions of mandatory disclosures, trying to find the most understandable ways of communicating the costs and risks of mortgages to non-lawyers. See CFPB Finalizes “Know Before You Owe” Mortgage Forms, Nov. 20, 2013. Take a look at the forms. (http://www.consumerfinance.gov/newsroom/cfpb-finalizes-know-before-you-owe-mortgage-forms/) Now that you have read this far, can you understand them?