Saturday, January 14, 2006

housing discrimination - race - predatory lending

McGlawn v. Pa. Human Relations Commn. - Cmwlth. Court - January 13, 2006

In a case of first impression, the court held that the Pa. Human Relations Act (PHRA), 43 P.S. 955(h), extends to a sub-prime mortgage broker's predatory lending activities such as reverse redlining. The court relied on federal precedent under the Fair Housing Act, 42 USC 3605, which is very similar to the PHRA, Hargraves v. Capital City Mortgage Corp., 140 F.Supp. 2d (DDC 2000). The court found that the evidence showed that the broker's lending practices and terms were predatory and unfair and that the broker intentionally targeted the plaintiff and the class because of their race, and that the practices had a disparate impart on the basis of race.

predatory character of the loans
The case has an extensive discussion of predatory lending, defining it as including: a) unreasonably high interest rates (more than point points above prime); b) loans based on the value of the asset securing the loan rather than the borrower's ability to repay; c) excessive loan servicing fees; d) targeting of a certain population on unfair or onerous terms which do not meet the borrower's needs; e) a strong likelihood that the borrower will be unable to repay the loan; f) balloon payments; g) prepayment penalties; etc etc.

broker liability
The court rejected the broker's argument that the it should not be liable because it had not approved the loans or actually loaned money. The court noted that the broker was "significantly involved in making the loan" as the middleman who creates the loan opportunity. The customer relies on the broker and expect that the broker will be able to get the best available deal. The borrower deals exclusively with the broker and never actually meets the lender; in the borrower's mind, the broker is the lender. A mortgage broker owes a fiduciary duty to its customers. In re Barker, 251 B.R. 250 (ED Pa. 2000). The PHRA applies to brokers. The broker's activities were a substantial part of the loan transactions at issue.

There was substantial evidence, including extensive advertising in the African-American community, a) that the broker intentionally targeted a protected class and b) that its policies and practices had a disparate impart on the basis of race. The PHRC established a prima facie case and rebuttable presumption of discrimination which the broker failed to rebut with some legitimate non-discriminatory reasons for its actions or that its lending practices were legitimate.

The court affirmed the part of the PHRA damage award consisting of monies paid to the broker out of the loan proceeds for items benefiting the broker but not the lender. The court reversed the damage award for the difference between the total interest on the predatory loan v. what the borrowers would pay on a loan at the prevailing rate, due to problems with defining the time frame and the proper credit rates that would be available to the borrowers. However, the court held that the borrowers were entitled to recover damages of this nature. The court also upheld the PHRA's authority to award damages for embarrassment and humiliation, as well as the PHRA's award of a civil penalty to each borrower/complainant.

Donald Marritz
MidPenn Legal Services