NAACP suits claim mortgage bias

The NAACP sued subsidiaries of two major banks Friday for allegedly steering African American borrowers unfairly into costly subprime mortgages.

The suits -- against Wells Fargo Bank and Wells Fargo Home Mortgage Inc., owned by Wells Fargo & Co., and against HSBC Mortgage Corp. (USA) and HSBC Bank USA, owned by HSBC Holdings -- arrive at a time when the housing crisis and soaring unemployment already are causing disproportionate harm in black neighborhoods, leaders of the rights group said.

The lawsuits, filed in U.S. District Court in Los Angeles, add to a long list of lenders that the National Assn. for the Advancement of Colored People has accused of "systematic, institutionalized racism" in litigation that began in 2007.

San Francisco-based Wells and London-based HSBC issued heated denials and said they would defend themselves aggressively.

Calling the litigation "unfounded and reckless," Wells said in a statement: "We have never tolerated, and will never tolerate, discrimination in any way, shape or form."

HSBC, which announced recently that it would shut down its extensive U.S. subprime lending operations, said in its e-mailed statement that it "stands by its fair lending and consumer protection practices" and is "confident that we have treated our customers fairly and with integrity."

HSBC said it had received no "substantive reply" when it tried on several occasions to discuss "issues of concern" with the NAACP.

Wells' statement said: "We have been working with the NAACP for the past two years to develop a partnership that would benefit the NAACP, its constituents, and our communities, so we are dismayed that the NAACP has chosen to abandon that constructive dialogue in order to pursue this litigation."

Civil rights and consumer groups contend that lenders, especially during the housing boom, created financial incentives for loan officers and brokers to sell mortgages with higher interest rates and fees than were merited, along with hefty penalties for borrowers who paid off their loans early. These loans could be sold at a higher profit in the secondary markets where they were traded as fodder for mortgage-backed securities, the critics said.

The NAACP suits result from studies by the government and advocacy groups concluding that blacks are more likely to wind up with higher-cost loans than whites, even when they have similar income, assets and credit scores. A report from the Center for Responsible Lending, which examined a variety of loan types, found that African Americans were 31% to 34% more likely to receive a higher-rate loan than whites.

NAACP officials and representatives of advocacy groups said the prevalence of higher-cost mortgages in black neighborhoods is exacerbating problems caused by the deep recession and collapse of the housing markets.

Unemployment among African Americans was at 13.4% in February, compared with 7.3% for whites, according to the U.S. Bureau of Labor Statistics. And while there have been no ongoing studies of foreclosure rates by race or ethnicity, a November paper by economists at the Federal Reserve Bank of San Francisco indicated that foreclosures were far more common among black mortgage holders.

According to the Fed study, "race has an independent effect on foreclosure even after controlling for borrower income and credit score."

"African American borrowers were 3.3 times as likely as white borrowers to be in foreclosure," it said, "whereas Latino and Asian borrowers were 2.5 and 1.6 times respectively more likely to be in foreclosure as white borrowers."

Benjamin Todd Jealous, the NAACP's president, said in an interview Friday that many subprime lenders were subsidiaries or affiliates of mainstream banks. When the subprime lenders set up shop in minority neighborhoods previously underserved by banks, he said, "the consumers trusted them, because for generations banks and financial institutions had been considered worthy of trust."

The lawsuits don't seek financial damages. Instead they ask the court to force the lenders to open their books to prove they have created systems to ensure that borrowers get the best mortgage for which they qualify, regardless of their race.

Jealous said the aim was to eliminate what the studies showed: that African Americans on average pay 2.3 percentage points more in interest than whites of similar economic standing for subprime mortgages -- the loans designed for borrowers with poor credit and heavy debt loads.

For prime loans -- lower-interest mortgages for people with good credit and less debt -- blacks on average pay nearly 1.3 percentage points more in interest, he said.

"We're not talking about the proverbial guy who is out of work and can't get a loan anywhere," Jealous said. "These are people with assets and good credit and jobs who were treated different than other people with assets and good credit and jobs."

NAACP officials said they expected the latest lawsuits to be combined with or heard in tandem with an earlier suit that named as defendants many subprime lenders that have long since quit originating loans. They include Ameriquest Mortgage Co. of Orange, Fremont Investment & Loan of Brea and Option One Mortgage of Irvine.

The rights group has asked U.S. Judge Andrew J. Guilford of Los Angeles to certify the suits to represent all African American borrowers who qualified for better mortgages than they received. Guilford has not yet ruled on that matter, but in January he refused to grant defense motions to dismiss the litigation, which opened the door for discovery proceedings allowing NAACP lawyers to subpoena bank records and question bank officials. The NAACP subsequently dropped its cases against JPMorgan Chase & Co. and General Electric Co.'s subprime lending unit, WMC Mortgage.

Notably absent from the litigation was Bank of America Corp., which stopped originating subprime mortgages a decade ago, and Countrywide Financial Corp., the Calabasas lender that nearly collapsed under the weight of souring mortgages before Bank of America took it over last year.

An NAACP news release in 2007 had mistakenly listed Countrywide and Wells Fargo as defendants. Both avoided being sued at that time by agreeing to discussions with the NAACP about settling the cases, according to people close to the dispute.

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