For some, what follows is a story of how government is removing control of the residential mortgage business from management. For others, it is a story of a determined effort to provide affordable residential mortgage alternatives to those who have historically suffered discrimination.
Whichever your view, the case described below is sure to stir emotions.
Our client, known for these purposes as For Profit Mortgage, has a policy of not making residential loans below a defined minimum amount.
For Profit has investors that generally buy its residential loans in the secondary market. However, these investors buy loans only in amounts at or greater than For Profit's minimum loan amount. For Profit has no independent resources to fund and retain mortgages in its portfolio. All loans are sold.
Testers Arrive
Suddenly, local government agencies unleash "testers" on For Profit.
One minority and one white tester telephone to apply for loans well above the For Profit minimum amount, and both applications are processed.
The following week, one minority and one white tester call to apply for loans well below the minimum. Neither application is processed.
According to local government agencies and the Department of Housing and Urban Development,
For Profit is violating the Fair Housing Act. For Profit has now been sued by a local government agency. That's right: A practice probably followed by most lenders and brokers may trigger a lawsuit. HUD has joined this action.
On behalf of For Profit Mortgage, we have strenuously argued that "business necessity" precludes it from making and selling smaller loans. Not only would it fail to make a profit on processing and origination (and sale) of small loans, it would lose money.
|Disparate Impact'
Yet HUD representatives maintain that even if no overt discrimination exists, a lender's practice that would have a "disparate impact" on a minority population will trigger a Fair Housing violation.
Our client intends to fight for as long as possible what it perceives as an unwelcome intrusion into its business. Settlement discussions are pending.
Moral: A lender that deems it advisable to implement a minimum should be certain it is justified as a business necessity.
However, by avoiding such a policy through the offer of some type of affordable-housing product, a lender may be obtaining the best insurance that HUD and local agencies stay away.
Mr. Bernstein is chairman of the Reed Smith law firm's consumer financial services group. This article is excerpted from its Consumer Compliance Report, which the firm sends to clients.
