On September 13, 2024, the United States District Court for the Southern District of Texas granted in part and denied in part the defendants’ motion to dismiss in CFPB v. Colony Ridge, Case No. 4:23-cv-04729. The Court held that the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice (DOJ) plausibly stated a claim for reverse redlining against three of the four defendants pursuant to the Equal Credit Opportunity Act (ECOA), 15 U.S.C. § 1691(a)(1), the Fair Housing Act (FHA), 42 U.S.C. § 3605, and the Consumer Financial Protection Act (CFPA), 12 U.S.C. §§ 5531, 5536.
On December 20, 2023, the CFPB and DOJ had filed a Complaint against a land developer and two of its affiliates (the “developer”), and a mortgage processing company for violations of the FHA, ECOA, and the CFPA based on allegations that the defendants engaged in reverse redlining by targeting limited English proficiency (LEP) Hispanic mortgage loan applicants on the basis of their race or national origin. The Complaint alleges that the developer heavily marketed its subdivision, largely consisting of vacant lots, to Hispanic-LEP consumers with easy financing and no credit checks, but in reality, was selling properties that would cost more to pay off and build on than most applicants could afford. According to the Complaint, the developer did not request any documentation to support applicants’ self-reported ability to pay the loans the company offered. In addition, the Complaint alleged that the developer’s “interest rates routinely exceed typical prevailing rates.” The Complaint alleged that the developer only provided the actual mortgage documents, including the application itself and required disclosures, in English, despite the borrowers’ limited English language proficiency.
The developer and the mortgage processing company filed a motion to dismiss. The Court dismissed the mortgage processing company because the Complaint did not allege that it participated in any of the lending decisions or targeted advertising.
The developer argued that reverse redlining was not a cognizable theory of discrimination. Although the Court acknowledged that neither the Supreme Court nor Fifth Circuit had recognized reverse redlining as a form of discrimination, it relied on other district court decisions recognizing the claim. The Court held that the Complaint plausibly alleged that the developer “targeted” LEP consumers and that it provided loans on unfavorable terms, and therefore met the definition of reverse redlining on the basis of national origin.
The developer made an additional argument as to one aspect of the FHA claim, brought under Section 3604(a) claiming that it never “refused to sell or rent . . . or otherwise make unavailable” property to the LEP applicants. The government argued that the high prevalence of foreclosures resulting from the consumers’ inability to pay back the high-interest loans was sufficient to allege that the developer “made unavailable” the properties. The Court rejected the government’s argument and held that a foreclosure-based theory was insufficient to state a claim under Section 3604(a) where the Complaint otherwise alleged that the developer offered applicants the opportunity to purchase land.
This lawsuit highlights the CFPB’s concerns about lending discrimination with respect to LEP borrowers. Mortgage companies and other lenders should consider whether they generate marketing specifically targeted toward specific communities, and if so, whether they then continue to support the consumer by providing interpretation services during the loan application and closing processes or mortgage documents in the same language as the marketing material.
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