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Prepare to Fight Suits Claiming Bias in REO Maintenance

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As if they didn't face enough challenges already, banks and mortgage servicers now must prepare for the threat of litigation claiming bias in the maintenance of foreclosed properties.

The evidence presented so far for such claims is questionable, but the complainant has a track record of aggressive actions against financial services companies.

On April 4, the National Fair Housing Alliance published a report prepared for it by the Relman, Dane and Colfax law firm concluding that banks and mortgage servicers maintained repossessed homes in a discriminatory manner in nine major metropolitan areas.

The report, entitled "The Banks Are Back – Our Neighborhoods Are Not: Discrimination in the Maintenance and Marketing of REO Properties," concluded that banks and servicers maintain and market real estate owned properties less favorably in minority neighborhoods in violation of the Fair Housing Act.

The report calls for federal banking regulators, including the Consumer Financial Protection Bureau, and Congress to conduct nationwide investigations into banks' and servicers' maintenance and marketing of REO properties. The report also asserts that municipalities have standing to pursue claims based on maintenance of such properties and highlights alleged harms to municipalities from maintenance practices.

In a press release announcing the findings, NFHA vows that it will begin filing complaints with the Department of Housing and Urban Development and lawsuits in federal district court citing the report as evidence. The plaintiffs' class action law firm Cohen Milstein Sellers & Toll will represent the group in these matters.

The report was prepared between May 2011 and February 2012, and was funded in part through grants from HUD and Fannie Mae. NFHA claims its staff visited over 1,000 REO properties in nine major metropolitan areas to evaluate the exterior condition of those properties.

The report concludes that REO homes in majority white neighborhoods were "cared for in a substantially better manner than those in communities of color." Specifically, the report stated that REO properties in white neighborhoods were more likely to have well-maintained lawns, secured entrances, and professional sales marketing, whereas REO properties in African-American and Latino neighborhoods were more likely to appear vacant and have poorly maintained yards, unsecured entrances, broken windows, and poor curb appeal. NFHA claims that the allegedly poor maintenance of REO properties in majority African-American and Latino census tracts has harmed residents and potential homeowners, purchasers of REO properties, and local governments.

Among a myriad of methodological defects, these drive-by observations appear to be entirely subjective. They do not account for the state of the evaluated properties before they were seized or whether the banks or servicers in fact improved the property from its original condition. Nor do they include properties that were undergoing repairs or renovations at the time of the evaluation.

Nevertheless, past NFHA discrimination initiatives against the property insurance industry and others suggest that servicers should expect a series of press releases and HUD complaints followed by federal court actions. Indeed, on Tuesday, the NFHA filed a discrimination complaint with HUD against one major bank based on the allegations in the report.

Servicers are well advised to evaluate existing policies, procedures, and practices relating to REO property maintenance, marketing, and sales, and ensure that their property preservation and sale activities are conducted in a non-discriminatory manner and consistent with their policies.

Andrew L. Sandler, Benjamin P. Saul, and Aaron C. Mahler are the chairman and executive partner, a partner, and an associate, respectively, at BuckleySandler LLP.

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Comments (2)
There are several mistakes in the piece written by Andrew Sandler, Benjamin Saul and Aaron Mahler.
First, the report published by the National Fair Housing Alliance (NFHA) on April 4 entitled, "The Banks Are Back--Our Neighborhoods Are Not: Discrimination in the Maintenance and Marketing of REO Properties," is solely the work of the NFHA staff and its fair housing agency partners who conducted the investigations, surveyed and photographed the properties, analyzed data, created maps and wrote the report under my direction and supervision. The Relman, Dane and Colfax law firm provided advice regarding the coverage under the Fair Housing Act, but did not prepare or write any portion of the report. A public retraction by Mr. Sandler of this serious error would be appropriate.

Secondly, NFHA asserts that municipalities have standing to sue for injuries and courts have allowed them to sue in cases alleging racial steering in sales cases and lending discrimination issues. See City of Evanston v Baird Warner, City of Chicago v Match Maker, City of Memphis v Wells Fargo, City of Baltimore v Wells Fargo, and Gladstone Realtors v Village of Bellwood.

Mr. Sandler suggests we should have considered the state of the property at the time of possession. The state of the property before foreclosure is irrelevant based on NFHA's evaluation of routine maintenance and marketing required for an REO. The owners of REO properties are supposed to mow the lawn, rake leaves, remove snow from walkways, secure doors and windows, repair or board up broken windows, remove trash from the property and place the REO on the market using a "For Sale" sign. What the REO looked like at time of possession has nothing to do with conducting routine maintenance and marketing the home. NFHA provided ample time from possession to investigation for the bank to make the REO presentable. Freddie Mac conducts this routine maintenance within 72 hours of possession.

We did not evaluate occupied properties for obvious reasons and we frequently asked workers where homes were under going some type of renovation if they knew if the bank owned the home or if there was a new owner. Sometimes they said they were the new owner even though records showed the bank still owned the home and other times workers simply did not know anything about who hired them to do the work. Without details of ownership, we decided it would be wise to exclude these homes.

Mr. Sandler did provide sound advice to the banks and servicers by stating they should evaluate existing polices and practices. If banks and servicers had taken NFHA's April 2011 to heart, we might have avoided the necessity of filing administrative complaints to correct the problems that lead to our allegations of discrimination under the federal Fair Housing Act.

It is NFHA's hope that banks and servicers will study both reports and reach out to us for assistance in complying with fair housing laws.
Shanna L. Smith, Presdient/CEO, National Fair Housing Alliance- Washington, DC
Posted by ssmith1016 | Thursday, April 12 2012 at 2:48PM ET
We appreciate Shanna L. Smith, President of the National Fair Housing Alliance, clarifying that the law firm Relman, Dane & Colfax provided legal advice regarding, but did not actually prepare, the April 4, 2012 report entitled "The Banks are Back - Our Neighborhoods Are Not: Discrimination in the Maintenance and Marketing of REO Properties." We hope that readers will note this additional information regarding the nature of Relman, Dane & Colfax's assistance in the preparation of this report. ~ Andrew L. Sandler, Benjamin P. Saul, and Aaron C. Mahler.
Posted by ecrawford1 | Friday, April 13 2012 at 8:17AM ET
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