How to Restore Communities Blighted by Subprime Loans

The recently announced settlement with Countrywide financial doesn't do enough to put borrowers back in their homes, let alone rebuild their neighborhoods

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Kevin Lamarque / Reuters

Attorney General Eric Holder

Soon a federal judge in California is likely to approve the “largest residential fair-lending settlement in history” ever reached by the Department of Justice in a bias case. The agreement requires Countrywide Financial Corporation to pay $335 million to African American and Latino borrowers who DOJ found to be the victims of Countrywide’s racially motivated fraud and deceit. Attorney General Eric Holder’s pursuit of the mortgage giant’s practices as conduct that “undercuts the notion of a level playing field for all consumers” is laudable. But without Countrywide’s admission of fault for overcharging and steering minorities into high cost loans when they qualified for conventional loans, it’s uncertain whether the agreement will stave off future unlawful behavior. Moreover, it certainly won’t be enough to repair the damage that has been done to those individuals and the communities in which they reside.

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To begin with, the $10,000 compensation some of the 200,000 Countrywide customers covered in the settlement are entitled to is likely not enough to put them back in their homes, let alone rebuild their neighborhoods. No one is more aware of this than Illinois Attorney General Lisa Madigan. Madigan’s investigation into Countrywide and Wells Fargo Bank began in March of 2008. From 2004 until 2007, at the height of subprime and high-cost lending, Countrywide was the state’s most prolific mortgage banker. During that same period, Wells Fargo aggressively embraced the increasingly lucrative subprime mortgage market as well. Madigan had been tipped off to huge disparities in the numbers of risky loans given to African Americans and Latinos by an investigation conducted by the Chicago Reporter. The Reporter found that African Americans, even those with six-figure salaries, were as much as three times more likely to get subprime or high-cost loans from the two lenders than whites or Asians and that the preponderance of those loans were given out in black and Latino neighborhoods. These practices, combined with the targeting of specific neighborhoods, wound up bankrupting poor working- and middle-class communities of color.

Madigan’s pleadings in a 2009 lawsuit filed against Wells Fargo outline how this discrimination siphoned off equity in neighborhoods until they became drags on municipalities and, over time, the state. Ongoing lawsuits against Wells Fargo in Baltimore and Memphis paint a similar picture and make clear the short-term and long-term negative impact of era’s lending tactics on the safety and security and the tax-based funding of schools in blighted neighborhoods. There is no reason to believe that Wells Fargo and Countrywide were the only banks engaged in such behavior.

Madigan flanked Holder at the news conference when he announced the settlement with Countrywide, which ends the state of Illinois claim against that bank. Yet, as she contemplated “the enormous amount of work that needs to be done to rebuild communities and our economy,” Madigan’s endorsement of the DOJ’s settlement agreement was understandably measured. Illinois’ suit against Wells Fargo continues. In it the state alleges that Wells Fargo broke a number of its consumer-protection and human-rights laws and asks for what could amount to much as $110,000 for every violation of credit and civil rights protections. Unlike the DOJ settlement, that compensates individuals, Baltimore and Memphis ask that a jury determine the amount of compensatory and punitive damages owed the cities for Wells Fargo’s actions.

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Yet, even if Madigan and the cities of Baltimore and Memphis prevail, more needs to be done. Relief is in order for countless other cities which the DOJ acknowledges continue to suffer losses attributable to the reckless practices of lenders leading up to the foreclosure crisis. Ultimately, after the financial market collapsed, the government bailed out the banking industry, including Bank of America, which now owns Countrywide. The industry rebounded because the government concluded that a secure banking system was in the public’s interest. Yet, the playing field won’t be level as long as American communities pay for the corrupt decisions made by lenders. A federal effort targeted at restoring blighted neighborhoods is needed to clean up the mess left behind by such egregious predatory practices as those alleged in the Department’s reports and pleadings. The establishment of a pool of money, drawn from fines for violation of the laws and modeled after the Environmental Protection Agency’s Superfund, to be distributed by the DOJ in collaboration with state and local governments, is also in the public’s interest. The process for prioritizing communities set for restoration and structuring relief could be coordinated with other agencies under the DOJ’s direction.

Speaking before Congress in April 2011, Attorney General Holder acknowledged that “communities of all kinds, in every state, from coast to coast” have been touched by the foreclosure crisis. But Holder noted that “communities of color [had] been hit particularly hard, and [had] suffered greater consequences” as the basis for his establishment of the agency’s enforcement of fair housing laws. Funding to restore the neighborhoods Holder’s team of attorneys, economists and mathematical statisticians have identified would enhance the DOJ’s effectiveness as well as assist state and local governments currently dealing with costs associated with these sites. As importantly, it would show our federal government’s commitment to the protections enshrined in our Constitution and laws.