A recent federal settlement on discriminatory lending practices was the biggest of its kind to date and speaks to a larger issue within the foreclosure crisis: the targeting of minority communities for risky subprime loans. 

Under the settlement, Bank of America has agreed to pay $335 million to customers affected by the discriminatory loan practices of Countrywide Financial, which Bank of America purchased in 2008. The settlement alleges that between 2004 and 2008, Countrywide lenders charged minority customers more in fees and other costs for their loans and steered minority customers toward expensive subprime loans with ballooning interest rates, while white customers with the same credit scores were offered standard prime loans with lower interest rates. 

“If you were African-American or Latino and you went to Countrywide for a loan and you were qualified, you likely paid more simply because of the color of your skin,” Assistant U.S. Attorney General Thomas Perez said during a Washington, D.C., news conference. “If you were African-American or Latino, you were far more likely to be steered into an expensive and risky subprime loan than a similarly qualified white borrower.” 

The feds estimate that Countrywide, which was not affiliated with the similarly named insurance company, treated about 200,000 minority customers unfairly between 2004 and 2008 by overcharging for their loans and/or pushing them into loans with higher interest rates than they qualified for. Countrywide sold more than 4.4 million loans during that period. 

After a two-year investigation, Illinois Attorney General Lisa Madigan filed a lawsuit against Countrywide last year. Madigan’s probe was spurred in part by investigative work done by journalists at the Chicago Reporter. The newspaper’s analysis of mortgage data for the Chicago area showed that Countrywide sold higher-cost loans to more than 50 percent of black customers and about 34 percent of Hispanic customers. Only about 20 percent of white customers received the higher cost loans. 

A statewide analysis by the attorney general’s office of more than 83,000 Countrywide mortgages that originated in Illinois from 2005 through 2007 found that the chance that African-American and Latino customers would receive a higher-cost subprime mortgage from Countrywide was three times greater than that of white customers. “Madigan’s analysis of Countrywide loan data found that the racial disparities could not be explained by objective factors, such as borrowers’ credit scores or debt-to-income ratios,” said a statement from the attorney general’s office. The federal settlement ends the Illinois suit.

Long before the housing bubble burst, the Chicago-based Woodstock Institute identified the creation of dual mortgage markets — one for white borrowers and one for minorities. A 1999 study from the institute found that subprime lending was skyrocketing compared with traditional loans, in part because of growing markets in minority communities. “While there are multiple causes of predatory lending, one fundamental source lies in the nature of mortgage markets in the U.S. Home equity and refinance lending are excessively segmented, especially by race and neighborhood. Lenders active in white and upper-income communities tend to be much less active in lower-income and minority neighborhoods. Conversely, many of the dominant lenders in minority areas tend not to compete for business in white areas, in part because their products are not competitive in that segment of the market,” stated a report from the institute. 

As subprime lenders began doing big business in minority communities, access to traditional loans lessened. Woodstock partnered with other community organizations to analyze data on seven metropolitan areas across the country, including Chicago. A 2011 report from the project, called Paying More for the American Dream, compared 2009 statistics on refinance lending to 2008 stats and found that during that time period, conventional refinancing loans increased in neighborhoods with less than 10 percent minority population by an average of 129 percent. They decreased on average in communities with 80 percent or more minority residents by 17 percent. In Chicago, the increase for such loans in white communities was 102 percent, and the decrease in minority communities was 41 percent. 

Don Carlson, executive director of Illinois People’s Action, says his community organization, based in Bloomington, has seen a trend of similar discriminatory lending practices downstate. ”When you look at the lending records of all the big banks, you see great disparities.”

And the Center for Responsible Lending has warned that the foreclosure crisis is far from over. “We show that at least 2.7 million households [nationwide] have already lost their homes to foreclosure, and more strikingly, that we are not even halfway through the crisis,” said a study from the center. According to the study, Lost Ground 2011: Racial Disparities in Mortgage Lending and Foreclosures, the majority of Americans who have experienced foreclosure in recent years are white, but minorities are more than twice as likely to lose their homes as white home owners. “These higher rates reflect the fact that African-Americans and Latinos were consistently more likely to receive high-risk loan products, even after accounting for income and credit status,” the study said. 

“In Chicago and in cities throughout our nation, we see too many African-American and Latino neighborhoods where boarded up houses now outnumber the homes occupied by families. These devastated neighborhoods are some of the most powerful evidence of the destructive and lasting effects of discriminatory mortgage lending,” Madigan said. 

Minority communities have been hit hard by all aspects of the financial collapse. In December, the unemployment rate for white Americans was 7.5 percent, while the unemployment rate for African-Americans was 15.8 percent and the rate for Hispanic Americans was 11 percent. 

“Every family has paid a steep price for the irresponsibility and recklessness on Wall Street over the last decade, but no group has experienced the pain of this crisis more than African-American and Latino families. Between 2005 and 2009, fully two-thirds of median household wealth in Hispanic families was wiped out,” Shaun Donovan, secretary of the Department of Housing and Urban Development, said at Washington, D.C., news conference. 

“Strong middle-class African-American neighborhoods that saw nearly two decades of gains watched them reversed in a matter not of years but of months.” 

While officials tout the Countrywide settlement for its historic size, others say it does not go far enough. 

Madigan estimates that those who experienced price gouging as a part of their loans will likely get payouts ranging from a few hundred dollars to a few thousand dollars. Those who were steered into loans with higher interest rates may receive about $10,000 to $15,000.

“It’s not going to make you whole,” Madigan said. “Obviously, the settlement doesn’t compensate you for the fact that you and millions of other people were put into loans fraudulently, to some extent, and/or illegally if it’s outright discrimination and now you’ve lost your home.” She agreed with the Chicago Reporter’s Alden Loury and Kimbriell Kelly when she was a guest on their radio program, the “Barber Shop Show” on WBEZ, that the settlement may not be able to right the lives of those who lost homes after being steered into subprime loans. Madigan’s Illinois suit sought restitution for those hit by discriminatory practices, as well as $25,000 in civil penalties for each violation of the Illinois Human Rights Act.

However, Madigan says the settlement is just one piece in an overall push to hold lenders accountable for unethical practices. That effort also includes a previous $8.5 billion settlement that Bank of America must pay investors for Countrywide’s toxic mortgage-backed securities. A national settlement with the biggest banks in the country over the sloppy, negligent and sometimes dishonest loan practices that many say helped to bring down America’s economy is in the works with the federal government and many state attorneys general. 

“This isn’t the last you’re going to hear of discriminatory lending, and it’s not the last you’re going to hear about other aspects of the predatory lending that really led to, I think, our entire economic crisis,” Madigan said. “So there are more people to be held accountable.” 

While Countrywide’s new owner, Bank of America, has agreed to pay under the discrimination settlement, no one is required to admit fault or wrongdoing, and no criminal or civil charges have been filed. A common stipulation of such federal agreements is that they close the door on further court action. “I think everybody agrees they’ve got one shot at this,” said Carlson, of Illinois People’s Action. He said that while the settlements seem as if they carry large price tags, they do not cover the estimated costs to homeowners that banks treated unfairly. A $20 billion penalty for the big banks has been floated as part of the pending settlement. The money would go toward loan modification efforts to keep struggling borrowers in their homes. But Carlson said the estimated damage caused by the banks is more like $200 billion. “The car is being driven to a place where the government is willing to settle for 10 percent of what the banks actually did.” Some attorneys general have voiced concerns with the potential deal, saying it could close the door to future investigations into lender practices. 

Carlson said he hopes Madigan will join these skeptical attorneys generals to push for greater penalties for the banks, including possible criminal or civil charges — policy changes that will result in better regulation and more efforts to keep people in their homes. “What does Lisa Madigan do with Wells Fargo and Chase and Bank of America? Is she going to be part of the group that settles for $20 billion?” Carlson asked. “People need champions, and I think that’s what we’re holding out hope that Lisa Madigan will be, that champion. Because we know that there can be a better outcome.”

Illinois Issues, February 2012